August 5, 2014

As a self employed entrepreneur or small business owner, you wear many hats. You don’t just perform the actual work of your consulting practice or company. You have to market and promote your products and services to potential customers, take care of the day-to-day and keep your financial affairs in order. This includes filing and paying federal and state income taxes. It may sound daunting, but the IRS provides tax deductions and credits for self employed workers and small business owners that don’t apply to wage earners.

Tax Tips For Small Business Owners

The following tax tips can help improve your cash flow as well as keep you in good standing with the IRS.

1. Hire Your Family Members For Tax Savings

If you plan to hire workers, the first place to look may be inside your own household. Hiring your offspring and spouse can net significant tax savings. Your children will have to declare the income you pay them, but their tax rate is likely lower than yours – and you can deduct the amount of their pay from your own taxes. In addition, if you pay health insurance premiums for family members, those expenses are tax deductible through Schedule C or Schedule C-EZ.

2. Join Industry-Specific Organizations

Networking is an essential aspect of making connections and gaining customers and clients. Industry specific membership organizations represent one of the best ways to raise your profile within your industry as well as keep up with industry related news and advances. Dues that you pay for memberships related to your business or consulting practice are legitimate tax deductions.

3. Take Advantage Of Capital Expenditure Deductions

Whether your business requires heavy equipment for its daily operations or you are a road warrior with a laptop, tablet and smartphone, costs for equipment to maintain your operations can be substantial. Capital investments must usually be capitalized and claimed as depreciations over time. But two upfront deductions for the 2013 tax year: Section 179 Deductions and Bonus Depreciation Deductions allow for upfront deductions.

Section 179 deductions apply to personal property that is put into service for your business during 2013. The maximum that you can claim for Section 179 deductions is $500,000, with dollar-for-dollar once purchases for a single tax year exceed $2 million. Specific guidelines for Section 179 deductions change every year; consult with an accountant or a tax professional for specific details.

Bonus Depreciation deductions allow you to deduct up to half the cost of qualified property, which includes furnishings, machinery, computers, software bought off the shelf or land improvements. Unlike Section 179 deductions, the IRS does not impose limitations or phase-outs on Bonus Depreciation deductions. Also unlike Section 179 deductions, you cannot choose which items to claim for the deduction. A tax professional like those at Optima Tax Relief can provide detailed information on how your company can utilize these deductions.

4. Self Employment Taxes are (Partially) Deductible

As an employee, your employer was responsible for paying half of your Social Security and Medicare tax obligations. As a self employed worker or small business owner, the responsibility for paying these taxes is all on you. But you can claim a deduction for the equivalent of your employer’s portion of your Social Security and Medicare taxes through Schedule C or Schedule C-EZ. (

5. Claim Credit for Interest and Carrying Charges

Being your own boss often means juggling an inconsistent cash flow. As a result, many entrepreneurs and small business owners rely heavily on loans and credit. The IRS allows self employed workers and small business owners to claim tax breaks on interest and carrying charges on loans and credit taken to cover business expenses.

6. Claim Tax Deductions From Losses

Deadbeat customers and thieves can wreak havoc on your bottom line. As a silver lining to what are often very dark clouds, the IRS allows self employed workers and small business owners to write off bad debts, theft and other qualified losses. If you had a bad year and suffered a net loss, you may be able to leverage the loss to offset income and revenue and thereby lower your overall tax bill. Consult with a tax professional to properly claim tax deductions from losses.

7. Operate a Business, Not a Hobby

The IRS allows generous tax deductions and credits for entrepreneurs and small business owners. That generosity does not always extend to hobbyists, even when the hobby is expensive or occasionally nets income. To avoid being slapped with disallowed deductions and tax credits, operate your business like a business.

Maintain orderly records and keep business and personal finances separate if possible. If you travel for business, hang on to every receipt and expense for a nice tax write off. You don’t have to turn a profit every year, but if you never make any money from your venture, the IRS is likely to determine that you are a dabbler rather than a professional.

8. Make Estimated Tax Payments

As a wage earner, you were spared much of the heavy lifting as far as ensuring that your taxes were paid in a timely fashion. Your employer took care of that through deductions from each paycheck. As a self employed entrepreneur, you must take full responsibility for that chore. Often, it makes sense to make quarterly estimated payments. Otherwise, you may find yourself facing a giant tax bill and hefty underpayment penalties come tax time.

We’ve put together an instructional article on How to Use IRS Form 1040-ES, Estimated Tax for Individuals.

9. Use Technology To Simplify Your Record-keeping

You probably have a smartphone, tablet or both. And if you work for yourself, you almost certainly have a computer. Check out financial apps and software designed to make it easier for entrepreneurs and small business owners to operate. Many software programs and apps are inexpensive or free. And the cost of pricey aids can be deducted as legitimate business expenses on your income tax return through Schedule C or Schedule C-EZ.

10. Deduct Tax Preparation Expenses

You may find that you need to use the services of an accountant, tax attorney or other tax professional. If so, the IRS has your back. You can write off the expenses involved with professional tax return preparation or legal advice related to your business as a business expense – no itemized deductions required.

Image Credit: Sam Churchill