Many entrepreneurs overlook perfectly justifiable — and legal — tax deductions simply because they are unaware of them.
To help you get started, here are the top five tax deductions that most small business owners often overlook:
1. Equipment expensing. Small businesses that are profitable can benefit from a so-called Sec. 179 deduction. This means a business can deduct up to $108,000 of cost for a single piece of equipment or in various items as long as equipment is placed in service before the end of the year.
2. Commercial buildings that go green. The deduction is as much as $1.80 per square foot for buildings that achieve a 50 percent energy savings target.
3. Domestic production activities. This deduction enables businesses to lop off 3 percent of their net profits from domestic production activities from their income — resulting in significant tax savings for owners without spending a single additional penny to receive the write-off.
4. Accelerated depreciation for building components. Parts of the building that are not viewed as structurally integral can be separately depreciated over much shorter periods (typically five or seven years) using an accelerated depreciation method. The more rapid the write-off, the greater the up-front savings to the building owner due to the time value of money.
5. Vehicle use. Business use of an owner’s personal car can be deducted using the IRS standard mileage rate (44.5¢ per mile in 2006) or the actual expenses related to this use. Dollar limits cap annual depreciation write-offs. A business may qualify for a tax credit for buying a hybrid vehicle or other alternative fuel vehicle.
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