In the winter of 2015, the IRS issued a report summarizing the income tax returns of over 23,000 nonfarm sole proprietorships in the United States for tax year 2012. The document contained a great deal of good news, including reported profits of over $304 billion — an increase of 7.9 percent over the previous year — and the highest ratio of profits as a percentage of business receipts (23.4 percent) in the United States in 25 years. It also offered some helpful insights into the kinds of tax deductions small businesses can claim in 2015.
The report lists the categories of deductions taken by small businesses in descending order by dollar amount. Although the summary is limited to sole proprietorships, almost all of these deductions are available to business partnerships, S- corporations, C-corporations and limited liability companies as well.
The No. 1 category, at 24.1 percent, was “Miscellaneous,” which includes items such as employee benefit programs; pension and profit-sharing plans; legal and professional services; meals and entertainment; home office expenses; depletion; and other expenses. The remaining top 10 categories are summarized below.
Top 10 Small Business Tax Deductions for 2012
Automobile expenses: Representing about 14 percent of total deductions claimed, automobile expenses include the cost of operating any vehicle used solely for business purposes whether it is registered to the business or an individual. A portion of your operating expenses for a personal vehicle used for business may be deductible as well. Expenses must be documented; so start saving your receipts for gas, oil, tires and routine maintenance now for next year. If you don’t have receipts for 2015, you can claim the current IRS allowance of 57.5 cents per mile.
Salaries and wages: This category includes wages paid to employees, not monies paid to the business owner, partner or members of an LLC. It accounted for 13.1 percent of deductions in 2012.
Rent on property: Accounting for 7.1 percent of business deductions by sole proprietorships in 2012, this category includes rent on any business property, such as office and storage space and equipment and machinery, all of which is fully deductible.
Contract labor costs: Many small businesses today use a temporary staffing agency or hire freelance contractors rather than employees. Payments for these services, which accounted for 6.9 percent of deductions reported to the IRS in 2012, are still deductible in 2015. Make sure to send a 1099-MISC form to any contractor to whom you paid more than $600 in 2015 so you have documentation of the expense for the IRS.
Depreciation: An allowance towards the purchase of business property, such as new or used business equipment and out-of-the-box software (versus software specifically developed for your firm), the tax deduction for depreciation in 2015 is $500,000, plus bonus depreciation of 50 percent. Depreciation accounted for 5.6 percent of sole-proprietorship tax deductions in 2012.
Supplies: This category includes almost anything you purchase for your business, including office furniture, office supplies (such as printer paper and ink cartridges) business machines, subscriptions to professional journals and telephones. In 2012, this category represented 5.5 percent of business expenses reported by sole proprietors.
Utilities: Accounting for 4.6 percent of the tax deductions in the IRS report, this category includes the cost of electricity and heat for your office space and charges for landline and cell phones. Home-based businesses that have a dedicated landline in a home office (separate from the home phone) can deduct the cost of the second phone in addition to portion of other utilities.
Taxes: Taxes accounted for a relatively small 3 percent of total deductions claimed by sole proprietorships in 2012. Deductible taxes include property taxes, licensing and regulatory fees and the employer’s share of FICA, FUTA and state unemployment tax. You can also deduct 50 percent of your self-employment tax. However, you need to claim it as an adjustment on your personal income tax return, not a tax deduction on your business return.
Repairs and maintenance: Routine maintenance and repairs to business property are fully tax deductible. These accounted for 2.8 percent of small business tax deductions in the IRS report.
Insurance: Also accounting for 2.8 of tax deductions in the IRS report, insurance costs include premiums for commercial general liability insurance, professional liability insurance, business interruption insurance, business owner’s policies and similar business coverage. Small businesses with fewer than 25 employees may also qualify for a health insurance tax credit of up to 50 percent of their premium contributions for employees.
Tax time is a great time for taking inventory of your business — to assess where you are today and set goals for the coming year. It is also the perfect time to discuss your business insurance coverage with an expert who can ensure that you have adequate protections in place. Our professional agents are available every weekday from 9 a.m. to 6 p.m., so call us at 516-292-3780 to set up an appointment for your insurance review. Or if you prefer, request a free consultation online now.