More Commonly Overlooked Federal Tax Deductions for Small Businesses – Part 2

Date: April 12, 2012

Guest Column by
Kathy Pickering

Kathy PickeringKathy Pickering is the executive director of The Tax Institute at H&R Block, the go-to source for objective insights on federal and state tax laws affecting the individual and small businesses. The Tax Institute is H&R Block’s independent research and analysis division which draws on H&R Block’s more than 55 years of experience as one of the world’s largest tax services providers.

In part one of this series, Kathy Pickering, executive director of The Tax Institute at H&R Block, provided five frequently overlooked federal tax deductions for small businesses. Kathy’s back to provide additional tips on tax deductions for small business owners. 

1. Legal Expenses and Other Professional Expenses

Turning to a lawyer for counsel is nothing new for many small business owners. What is new, and often overlooked, is the fact that legal and other professional fees related to the operation of your business are tax-deductible. It’s important to remember that while you can deduct the majority of your legal bills, you cannot deduct legal fees paid for the acquisition of business assets. Even tax preparation costs can be deductible as a business expense.

2. Interest

Interest on business loans can add up through the course of the year, but most of this interest is tax-deductible. The key is that you must use the loan for an expense related to your business. However, if a loan is used for personal and business purposes, you can still take advantage of this deduction by simply multiplying the total interest by the business-use percentage to calculate the deductible portion.

   RELATED: Small-business lending tips

3. Retirement Plans

Retirement plans are more than smart planning for the future; they may also provide a tax benefit for setting aside money for yourself and your employees. If your business does not have a retirement plan in place, this deduction for starting a plan may help get you on your way. Training costs associated with establishing a program also are deductible by up to 50% of its cost (up to $500 per year) during the first three years of implementation.

   RELATED: What retirement plan sponsors need to know about changing regulations

4. Hiring Unemployed Workers

Your new hires can help your business in more ways than one. In 2010, the Hiring Incentives to Restore Employment (HIRE) Act was signed into law by President Obama to provide an incentive to hire previously unemployed workers. The maximum is $1,000. To be eligible, an employee must meet certain wage requirements, have been hired in 2010 on Feb. 4 or later and retained for at least 52 weeks.  

5. Carryback

In tough economic times, steady performance can be difficult for some small businesses. If you face a year of losses, you can take advantage of what is known as a “carryback” to offset income on your past tax returns. Net operating losses of your business must be carried back two years and then forward 20 years to offset past or future income.   

At the end of the day, the best advice for any small business owner is to plan ahead and work with a tax professional. Keeping proper records and getting advice from a tax professional who knows how to work with small businesses and handle personal taxes can help you apply the many federal tax deductions for small businesses and get the most out of your annual tax filing.

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