3 little-known tax breaks for small businesses

Dye and Whitcomb CPA Newsletter

Some tax planning moves for small businesses are more common, like acquiring property that qualifies for the generous Section 179 expensing allowance. But other strategies may fly under the radar. Here are three little-known ways to save:

  1. Building improvements: Generally, amounts paid to improve tangible property must be capitalized and depreciated over time, but recent regulations provide a unique tax break. Under a safe harbor election, a qualified small business may deduct certain building costs above the maximum Section 179 allowance. The election is limited to $2,500 per invoice or item or $5,000 if you have an applicable financial statement (AFA) audited by a CPA.
  2. Employee bonuses: Normally, employee bonuses are deducted in the year they are paid. However, for an accrual-basis company, bonuses are currently deductible if fixed by year-end and paid within 2.5 months of the close of the tax year. Thus, your small business may deduct year-end bonuses on its 2017 return if they are paid by March 15, 2018 (other than bonuses paid to majority shareholders of a C corporation, certain owners of an S corporation or a personal service corporation).
  3. Start-up expenses: The tax law allows a small-business owner to claim a first-year deduction of up to $5,000 for qualified start-up costs. Any remainder must be deducted over 180 months. However, the $5,000 write-off is phased out on a dollar-for-dollar basis for start-up costs exceeding $50,000.

Some typical start-up expenses are:

  • An analysis of potential markets, products and costs
  • Advertisements for the opening of the business
  • Wages paid to train employees
  • Travel for securing prospective distributors, suppliers, customers or clients
  • Fees paid to outside consultants for professional services

There is one catch: You must be open for business before the end of the year if you want to claim this for 2017. So make sure that the public has access to your goods or services before Jan. 1.

Contact Dye & Whitcomb and we can help you determine what types of small business tax breaks might be applicable to your specific situation.

Can you deduct a medical home improvement?

Are you planning to make substantial home improvements in the coming year? Normally, you can’t deduct home improvement expenses on your personal tax return. However, you may be able to deduct the costs of medical improvements to your home.

It may be worth doing, but first there are several tax law obstacles to overcome.

Potential roadblocks

Under current law, you may only deduct medical expenses in excess of 10 percent of your adjusted gross income (AGI). If you don’t clear that 10 percent for the year, you get no deduction. This is a high bar for many taxpayers.

To determine if you qualify for a deduction, add up the unreimbursed medical expenses that satisfy the tax law requirements. An expense counts toward the 10 percent only if it’s for medical care for you, your spouse or your dependent. Conversely, an expense that is just beneficial to your general health rather than a specific health issue, or one that’s done for personal motives (e.g., architectural taste) isn’t deductible.

When a homeowner makes an improvement for medical reasons, the deductible amount is limited to the cost above the increase in the home’s value. For instance, if a $10,000 improvement increases the value of your home by $4,000, $6,000 counts to the deduction. Improvements made by tenants are fully deductible, as they don’t benefit from the increase in the home’s value.

What sort of home improvements qualify?

An allergist may recommend installing central air conditioning or a swimming pool to alleviate a child’s asthma. Or, you might build an elevator or bathroom on a lower floor to benefit someone with a heart condition. Other improvements could include (but aren’t limited to):

  • Making doorways larger
  • Adding entrance or exit ramps
  • Installing railings
  • Modifying electrical outlets and warning systems

Don’t leave matters to chance. If you qualify for a deduction, obtain a written statement from a physician prescribing the improvement, and an independent appraisal of the increase in the home’s value.

Combat identity theft with a credit freeze

A credit freeze (also known as a security freeze) can be a great weapon against identity theft. It lets you restrict access to your credit report, tripping up con artists who try to open accounts in your name. Lenders won’t extend credit if they can’t check someone’s payment history.

If you suspect a crook is attempting to gain unauthorized access to your credit report, a credit freeze is a good first step.

How does a credit freeze work?

Contact each of the nationwide credit reporting agencies. You’ll need to provide information in writing or online including your:

  • Name
  • Address
  • Date of birth
  • Social Security number
  • And other identifying information

Be aware that freezing your credit report will not automatically freeze your spouse’s report. You’ll have to do this for each of the three credit reporting agencies: Equifax, Experian and TransUnion. One credit agency is not obligated to inform the other two about the request.

Placing a freeze on your credit report doesn’t affect your credit score or prevent you from ordering copies of your report. A credit freeze will typically last until you remove it, either permanently or temporarily with a designated PIN or password.

Credit freezes are not foolproof

Government agencies, such as taxing authorities, still have access to your credit report. It also may be released in response to court orders, subpoenas or search warrants. And collection services and current creditors will still be able to get the information they need to contact people. In other words, a credit freeze won’t shut out legitimate debt collectors.

If you’re planning to apply for a job, take out a mortgage, switch utility providers or shop for insurance, find out which credit reporting agency each business typically uses. That way you can remove the specific credit freeze needed while still roadblocking other credit reporting avenues from identity thieves.

The ABCs of business education deductions

Now that the kids are back in school, you may have the itch to return to the classroom yourself, perhaps to brush up on certain skills in your field or expand your horizons. Can you deduct the cost of business education? It depends.

Generally, you can deduct business expenses only if one of these two requirements is met:

  1. The education is required by your employer or is mandated by law.
  2. The education maintains or improves the skills needed in your present work.

A couple caveats

That sounds simple enough, but there are also a couple things that can disqualify you for the deduction. First, if the education is required to meet the minimum educational requirements of your trade or business, then you are expected to pay that cost as a normal part of doing business — and without a tax break. Second, if the education qualifies you for an entirely new trade or business, then you also don’t get to use the deduction.

It’s the second caveat that often trips up taxpayers. For instance, if a nurse starts taking courses that will result in a degree as a physician, the courts have said that the education expenses can’t be deducted because it qualifies the nurse for a new line of work.

If you qualify for the deductions

Assuming you do qualify, you may deduct expenses like tuition, books, laboratory fees, equipment and transportation between work and school. Typically, the cost of the trip is deductible if you go straight to class after work. You can’t write off travel costs if you stop at home for a snack or to change into more comfortable clothes, however.

When you pay business education costs out your own pocket, the expenses are deductible as miscellaneous expenses, subject to a floor of 2 percent of adjusted gross income (AGI). However, if your company reimburses you, payments are generally deductible in full by the company and tax-free to you. Alternatively, an employer may establish an educational assistance plan (EAP) that provides up to $5,250 in annual tax-free benefits to each participant.

“Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in “Tax Tips,” or if you’d like to be on our mailing list to receive other tax information from time to time, please contact our office.