Check it out: 10 tax breaks contractors often miss.
Beyond owing money to the IRS, one of the biggest causes of tax anxiety for contractors is missing out on deductions. After all, you deserve every break you have coming from Uncle Sam.
Check out these often missed opportunities to lower your tax bill. Taking advantage of them could help you save thousands of dollars now and in the years ahead.
1. Home office deduction. Do you run your contracting business out of your home? You could be entitled to a deduction if you use a dedicated space to do so. Many business owners don’t take this deduction because they believe it triggers audits and other IRS-related issues. (Data doesn’t support this myth.)
Rules about this deduction have been simplified in recent years and the IRS now offers an easier way to take it. If you’re unclear about whether you qualify, or the best way to calculate your deduction, turn to an experienced tax expert for guidance.
2. Start-up costs. If your business is new, you can deduct up to $5,000 in start-up expenses and $5,000 in organizational costs from your taxes. If your totals are higher than this (up to $50,000, with certain limits), you could amortize those costs and write them off for a period of up to 15 years.
3. Inventory. Did you know, within certain limits, you can use the cash method of accounting to deduct current inventory items from your taxes rather than waiting until they are used on a job? This can be a great way to improve cash flow.
Be aware: The rules around this are extremely strict and particularly complex for contractors. You must file paperwork to qualify for the deduction. Only standardized off-the-shelf or manufactured items qualify. (Anything customized for a particular client is not allowed.) An accounting firm experienced in working with contractors can advise you on whether shifting how you account for your inventory is a smart move for you.
4. Business equipment. Most business owners are aware that they can deduct certain types of equipment from their taxes. This is a great benefit for contractors, who depend on a lot of expensive tools and vehicles to do their work. The good news is that Section 179 of the tax code has been extended after a period of uncertainty. That means certain types of equipment, within limits, can be deducted from taxes as a current year expense rather than amortized over a period of time.
Many types of equipment are covered under the rule, including certain types of software. The qualifications associated with section 179 are complex, but it’s an opportunity worth discussing with your tax advisor.
5. Research and development costs. Most contractors don’t think of themselves as “researchers.” That’s a term reserved for scientists working in labs. The truth is that if you develop an original way of doing contracting work, or a new tool or product to get a job done, you may be able to write off some of the costs associated with creating your “invention.”
Also, this credit is retroactive, which means that if you did this type of activity in the past and didn’t take a deduction, you still may be able to. The tests associated with the research and development credit are challenging, but leveraging it can really pay off. An expert can guide you through the process.
6. Bad debts. Contractors often make loans. Examples include advancing money to employees to purchase tools and equipment or subcontractors to get established in business. Unfortunately, loans sometimes don’t get repaid. Did you know you may be able to deduct the value of an unpaid loan as a bad business debt? It won’t return all the money to you, but it will reduce the impact on your bottom line.
7. Bank fees. Bank charges really add up. However, most of the fees associated with your business banking activities can be written off. This is one of the most basic tax opportunities business owners miss.
8. Education expenses. Contracting is an ever-changing field. It can be tough for your employees to keep current. The IRS offers opportunities for you to help your employees learn new things that could make them better and more efficient workers.
These programs can be structured as reimbursement or educational assistance programs. You and your employees may both qualify for a write-off. Be aware that, as is the case with most things the IRS does, this deduction comes with a complex array of qualifiers. If you’re interested in helping your employees further their educations, a tax advisor can work with you to structure a compliant program.
9. Mileage. Contractors spend a lot of time in their vehicles, driving to work sites, suppliers and client meetings. You can deduct mileage and other expenses (insurance, repairs, etc.) when you use your vehicle for work purposes. The IRS offers a number of options for calculating this, and you owe it to yourself to take the time to select the best option for your personal tax situation.
10. Tax preparation fees. We often recommend that contractors work with an experienced accountant or tax preparer to optimize their tax situation. To many, it seems counterintuitive that you have to pay someone to reduce your tax bill.
The IRS offers some relief for these costs. Some of the fees associated with working with a professional to prepare last year’s taxes can be deducted from your current year taxes.
These are just ten of the most common tax write-offs contractors forget to (or don’t know they can) take advantage of. Depending on your individual situation, there could be countless others you might be missing. Contact us today. We’ll take a fresh look at your taxes to find opportunities to lower your tax bill.