Making Every Penny Count: Little Known Tax Deductions for Small Business Owners

For most people this time of year means large tax refund checks followed by a trip to the electronic store to purchase a new TV or maybe a trip to the car lot to put a down payment on a new vehicle. I miss the days of waiting around for a tax refund and debating over what frivolous item I was going to spend my money on. Unfortunately, I’ve been inducted into the harsh world of small business owner reality. Owning your own business is a downer this time of year, unless you are one of those suck-ups who actually follow the IRS rules and make quarterly installments, as you should. As for me and my company, we find that paying penalty taxes and additional interest is just too much fun to give up and prefer to pay on April 18th, the absolute last day we can possibly pay, that is unless we file an extension, which we usually do. So, for those of you who find yourselves in the same boat, and instead of waiting for that tax refund you are preparing your escape from the US to avoid paying taxes, this article is for you.

Each day there are more and more designers and computer programmers tired of working in corporate environments and starting their own companies. Our trade lends itself to freelancing or small business ownership due to the creativity level. Being stuck in a cubicle or following corporate guidelines doesn’t exactly spark creativity. The only problems is, once you get out on your own and start a small business it can be hard to know what business expenses are deductible and what expenses are red flags for the IRS. The IRS likes to call this “ordinary and necessary” business expense. The only problem is their definition of “ordinary and necessary” doesn’t exactly fit my definition. I read an article once that said your expenses must pass a laugh test, that is if you can write the expense down and not laugh, then it’s most likely deductible. My idea to purchase a yacht and paint our company logo on the side and use if for client meetings and company dinners didn’t exactly pass the laugh test.

One of the most confusing tax deductions for my company is nonprofit work. We have been to tax attorneys that say artwork is a good (intellectual property) and therefore tax deductible, and we have been to tax attorneys that say it’s a service and therefore not tax deductible. The answer is No; design is a service and not tax deductible. We learned this lesson the hard way. Since we don’t charge taxes on design, it’s not considered a good; however there is a tiny loophole that could benefit some of you. You can invoice the nonprofit for the entire amount and have them cut you a check. Your firm, at some point, will then donate that same amount back to the nonprofit organization. This is 100% tax deductible, up to a certain amount. The down side to this is the amount you invoiced the nonprofit for becomes income that you will have to claim, so you will pay a little more in self employment taxes and a little less in income taxes. If you have been in business for three years and need to show a profit, then this might be a great idea for your firm.

There is a little known healthcare plan called a MERP (Medical Dental and Drug Expense Plan) that benefits taxable LLC’s and “C” Corporations. Basically, your company would implement an insurance plan with a high deductible. Medical, dental, prescription and not prescription drugs not covered under the health insurance plan are deductible up to a stipulated amount without employees having to include the amount as income. So, the company pays for non-covered medical expenses, tax deductible, and the employees don’t have to report it as income. This benefits employees because you can only deduct extra medical expenses (prescriptions, co pays, root canals etc.) if they exceed 7.5% of your adjusted gross income. I know this sounds too good to be true, but wait there’s more. You can implement this plan anytime during the fiscal year, and it becomes retroactive. Definitely speak to a tax accountant before you set up a MERP plan.

Many of you may know this one, but just in case I’ll tell you anyway. A corporation or LLC can deduct education expenses for all employees up to $5,250 each year. This could be in the form of classes, seminars or workshops. Hello How Design seminar in Chicago! The only stipulation is that it must be related to their current line of work. In other words, if you are currently a designer the company can’t pay for you to go to culinary school.

Last but not least, and my personal favorite of all tax write offs, is paying your minor child to work at your business. If you own your own business, you can hire your child to work after school or during the summer. They can earn up to $4,850 without having to file a return. You can file a W4E exemption form to keep the IRS from withholding social security contributions. The child can contribute up to $5,000 a year into an IRA or Roth IRA. Hello college fund! Having said this, let’s not go crazy. Please do not hire your 2 year old to vacuum your floors and take out the trash. The IRS might think it’s a little suspect.

In closing I would like to say that I am NOT a tax attorney or accountant. While I have spoken to the IRS up close and personal more times than I would like to remember, the tax deductions mentioned in this article should be discussed with your company accountant before implementing. Remember to use common sense when filing taxes, and try out the laugh test, because it really works. I laugh all the time when filing my taxes.