Small Business Tax Deductions
June 27th, 2006I want to move away from some of the investing banter of late and into some taxation issues. Today I want to address some lesser known small business tax deductions that may aid you if you are the owner of your own small business.
Now, as small business owners we are all interested in taking money out of our businesses with little or no tax consequence. Most of us are familiar with the home office, car mileage, and travel expense related deductions but there are some other very useful deductions that many small business owners do not take advantage of. A lot of little deductions can add up to some big tax savings.
DISCLAIMER: The following information should not be misconstrued as "tax advice". It is general in nature and should be used simply as a starting point for you to consult your tax professional.
Small Gifts to Employees
Small gifts to employees totaling less than $25 per year per employee are tax deductible to any business. This means, as owner/employee, you can give yourself a business gift (say a Thanksgiving Turkey) of less than $25 and deduct the cost of it from your business income.
Performance Bonuses / Achievement Awards
A company can setup a "qualified awards plan" and give its employees an award of up to $1600 in value per year. This award must be for special achievements like length of employment, safety record, etc. Now, there are some stipulations for this type of award. 1) It cannot be paid in cash - the company has to buy the award and then give it to the recipient. 2) These awards cannot be given to more than 10% of all employees and 3) The awards cannot be given only to highly compensated employees.
Even if your company does not set up a qualified plan you may still give each employee an award of up to $400 per year. Cash payments are unacceptable here as well.
See IRS publication #535, Business Expenses for more details on this.
Day-Care Benefit
Any business can deduct the expenses it incurs in sponsoring a day-care assistance program for its employees. (Dependents must be under age 13). Payments of up to $5,000/yr per parent are tax-free to the parent and deductible to the company. So hey, if you send your kids to daycare and you own your own business you really could be setting up a dependent day-care assistance plan to pay yourself some tax-free money. Of course, the downside of this is that the benefit must be given to every parent on the payroll. If you are not the only employee of your company then this might not be so beneficial for you.
When consulting with many of my friends who own small businesses I find that many of them do not take advantage of the numerous small perks you get for owning your own business and setting up the proper compensation plans. Ask your tax pro to help you find ways to squeek out some more deductions for your business. I'll have some more ideas for you in future posts.
"Taxes are not good things, but if you want services, somebody's got to pay for them so they're a necessary evil."
-Michael Bloomberg
Disclaimer: this post is for informational purposes ONLY. Please read the disclaimer before even thinking about relying on me to make a financial decision!
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