With so much red tape, you'd be forgiven for thinking the Internal Revenue Service (IRS) has a love-hate relationship with the country's small and medium businesses (SMBs). However, when you dive into the details of what most SMBs can claim as tax breaks, it’s clear Uncle Sam is more generous than you think.
First, know that Washington wants tech-savvy SMBs that are equipped for a digital future.
Under Section 179 of the tax code, IT hardware expenses such as desktop computers, laptops, tablets, printers and scanners are tax deductible, up to a certain amount. Depending on the item, you can deduct the full cost on the year of purchase, or split it between several years. Your tax agent will have the details.
Section 179 never sleeps
Recent Section 179 changes added items like off-the-shelf computer software to the list of items that qualify for deduction.
Your SMB can now deduct the full cost of your IT equipment in the first year. The proviso is that you must employ it in that same tax year and use it in your business for at least 50 percent of the time.
Just be aware of the amount you can deduct under Section 179 because it changes each year. Your tax agent can help you maximize your return.
Claim your bonus
Another tax break to remember is bonus depreciation. This allows you to deduct 50 percent of the costs of new capital equipment. However, the bonus depreciation deduction will phase out incrementally from this year, reducing from 50 percent (2017) to 40 percent (2018) and finally 30 percent (2019) before it expires by 2020.
The day-to-day expense deductions you must not miss
Operating expenses are the costs you incur in running your business – such as stationery or renting office space. These costs are sometimes called working expenses. You can claim a deduction for most operating expenses in the same income year you incur them. For SMBs, such IT-related expenses might include:
- Education, technical or professional qualifications.
- Insurance premiums on your tech gear.
- Interest on money borrowed to buy your tech gear.
- Renting or leasing business premises to house your tech gear.
- Legal expenses, such as those incurred borrowing money or obtaining tax advice.
- Costs of running a commercial website, such as site maintenance, content updates and internet service provider fees.
- Tax agent and accountant fees.
Big purchases can bring big breaks
Capital assets – items with some longevity – include buildings, motor vehicles, furniture and of course some IT equipment. SMBs can claim as a capital expense:
- The cost of an asset that has a longer life (usually more than one income year).
- An expense associated with establishing, replacing or improving the structure of your business.
Got a website?
You might be able to claim the expenses you incur in creating and maintaining a website for your business, such as the costs of software, website development, domain name registration and server hosting.
Don’t forget any tax gifts from your state
Most states also offer sales tax exemptions for research and development (R&D) and custom computer programming. For example, any custom computer programming purchased by a business is exempt from sales tax. If you buy a standard program, then customize it, the cost of the standard program is taxable. However, the customizing, if you state it separately, is non-taxable.
The tax reward in R&D
Finally, a change in the R&D tax credit means businesses that make less than $50 million annually and invest in research can now apply the credit to the alternative minimum tax (AMT) or possibly even to offset payroll taxes.
The IRS web site has details about the deductions available to SMBs
Remember, the worst thing you can do at tax time is avoid your share. The second worst thing you can do is pay too much. So, check with your tax agent and make sure you're getting back exactly what you deserve.