Tax Deductions that many small businesses don't think about

If you are like most people, you've just went through one of the most dreaded times of the year - tax filing. With that pain in mind, this is the best time to talk about what deductions you may or may not have missed.

Most people seem to think that a business isn't really a business until you have an employee. That those at-home party businesses like Pampered Chef or Mary Kay aren't businesses that need to be tracking expenses and creating deductions at tax time. That thought process couldn't be farther from the truth. From the day you decide to become a business owner - no matter the size of your business - you should be tracking expenses and keeping receipts.

Here are few examples of deductions that many sole proprietors do not realize they should be taking advantage of.

Not Paying Quarterly Taxes - Every business will need to pay taxes. The question becomes, do you pay the taxes on your own, in your tax filing, or do you them quarterly? The answer depends on how much profit your business is making and the requirements of your state.

For many small businesses, quarterly tax payments are a requirement. If not made on time the business will incur fines until the taxes are paid. The quickest way to find out if your business is required to file taxes, please visit the Self-Employed Individuals Tax Center. Your financial adviser can best advise you on the state requirements for tax filing.

So, if your business isn't one of those required to file quarterly tax payments no need to worry about the subject, right? Not so fast. You should at least look at your businesses quarterly profit and loss statement and decide if a portion of the sales should be set aside to help pay any tax payments needed at the end of the year based on your additional income.  Again, your financial adviser will be able to help you calculate how much you should set aside.

Under Reporting Your Business Income - Every client that you have that has paid you at least $600 in one calendar year is required to send your business a 1099-MISC stating your compensation. The IRS will be in receipt of a duplicate copy of that form. You guessed it, there is no way of getting out of reporting the income. Even if your client does not send you the 1099 form, you are still required to to add the income to your bottom line.

The IRS may not realize the mistake this year, but they will find it eventually and come a calling. Don't waste your time, or money in penalties, just report the actual income your business received.

Home Office  Deduction - Many business owners are scared of this deduction because it seems confusing and may increase the chance of an audit. The important fact to remember is that if you have a dedicated office in your home, you may use this deduction. Do you only use part of a room for an office? This deduction may still be for you. The important fact to remember is that the room or area must be exclusively used for your business.

In 2013, the IRS introduced a simplified method of figuring this deduction. Take the square footage of the room or area devoted to your business and multiply by $5. The deduction using the simplified method is capped at $1,500 per year.

For many business owners, it may be more advantageous to use the actual expense of the room. This is where your tax adviser may be the most helpful. Run the numbers past him or her and decide how best to proceed; just make sure to not leave the deduction on the table.

Over Deducting Your Gifts - For some business owners the heading should be - over gifting your clients is a waste of money. First, let's discuss what "gifts" mean. In this context they could be anything from holiday presents to small tokens of appreciation for their business. Remember, the gift must be relevant to the success of your business and the relative relationship with the client.

So, how extravagant should you be with those gifts? IRS allows a business to deduct only the first $25 of gift cost per recipient. So, whether you spend $100 on one gift or on multiple gifts, only $25 is deductible. I'm pretty sure you know how much I would spend on each client. Make sure you keep all receipts for the gifts that you purchase, because the IRS will ask for receipts. That also means you should never over-inflate the gift deduction; a $2,000 deduction means you spent $25 on 80 clients. If that isn't true, don't report it.

Difference Between Equipment and Supplies - The IRS treats equipment and supplies differently. Let's take care of the definitions first.

Supplies = Items that get used during the year. Examples are printer ink, paper, envelopes, etc.

Equipment = Typically higher value items that last longer than a year. Examples are computers, software, business furniture, etc.

The cost of supplies will be reported on Schedule C; whereas, equipment costs will be reported on Form 4562. It isn't a good idea to mix them up because there are limits for many items and the deduction may be denied if not applied correctly.. Additionally, equipment can be written off through a full deduction (depending on the cap) or depreciated each year. Your financial adviser will be able to steer you in the right direction.

Not Reporting All Your Expenses - When asked which business expenses constituted tax deductions, most people answered  correctly with  computer equipment, mobile phone plan, health insurance premiums, and travel. However, many business owners, especially the sole proprietor, didn't realize that books, online courses, mileage to meet with clients, Web hosting, and stamps can also be deducted as expenses.

The best idea is to track all expenses that your business incurs. Then at the end of the year, go over those expenses with your financial adviser to best determine which can or cannot be taken as deduction. Your organizational efforts will not go to waste. Whatever cannot be deducted, can certainly be entered into your annual budget for next year to better determine your business goals.

Choosing the Wrong Legal Identity - Unfortunately, many sole proprietors do not realize that the legal identity of their business can positively or negatively affect the amount of taxes due to Uncle Sam. Sometimes legally establishing a C Corporation, S Corporation, or LLC that's taxed like an S Corp may help lower the tax bill.

A discussion with your tax adviser may clear up any confusion and set you down a clear path for success. You can even do your own research be looking at the information available on IRS' Self-Employed Individual Tax Center website.

As you can see, there are many ways those who have a very small business can still take advantage of tax deductions. With a little organization, advice from your financial and tax advisers, and some persistence you can be better prepared when tax time comes around next year.