Pro & Cons of a Small Business Standard Tax Deduction (3 Minute Read)

Pro & Cons of a Small Business Standard Tax Deduction (3 Minute Read)

Under the current political process there’s a mention of expanding the Standard Tax Deduction for all Small Business operations.

The standard tax deduction is available to all individual and small business taxpayers. Tax deductions for businesses reduce income tax liabilities. Those who operate sole proprietorship or Sub-chapter S corporations (where all net income is allocated to stockholders personally) have the option to choose a standard tax deduction or itemize their deductible expenses. There are benefits and downsides to selecting the standard deduction, both of which should be familiar to all small business taxpayers.

Standard Tax Deduction Pros

The Internal Revenue Service (IRS) annually publishes the standard tax deduction maximum amount. Even those taxpayers with low tax-deductible items can use the standard deduction without fear of problems. It is easy and saves the time to itemize all deductible items from a tax year. The standard deduction eliminates the need for taxpayer understanding of the complexities of IRS deduction rules and definitions. This can benefit those who do not own real estate or have a mortgage loan. The amount of the standard tax deduction increases for married taxpayers filing jointly, households with children and dependents, heads of households, widows and widowers, those age 65 or older, and those who are legally blind.

Standard Tax Deduction Cons

Taxpayers can lose the benefit of allowable tax deductions by using the standard deductible amount. People often forget or fail to record allowable tax deductions and settle for the standard amount specified by the IRS. For example, homeowners often pay more interest and real-estate tax than the standard deduction permits. Also, small business owners who have a working home office often can incur additional tax deductions above the standard amount. Taxpayers must keep accurate records (with original receipts) to itemize deductions. Failure to do this makes the standard deduction a benefit but also may cost you many dollars in tax savings.

Considerations

Keeping good records during the calendar year helps to maximize tax deductions. Even if your total falls below the standard tax deduction, at least you will get the maximum money-saving benefit by using the standard amount. Don’t forget some commonly overlooked deductible items. Casualty and theft losses, even if partially covered by insurance, usually are deductible. Losses suffered in excess of insurance reimbursement should qualify. Medical expenses, above those reimbursed by health insurance, also are qualified deductions, including mileage incurred getting to and from doctors, hospitals and medical test procedures. Finally, consult an experienced tax adviser before taking any questionable tax deductions, unless you use the standard amount permitted. The standard tax deduction requires no detailed records or other evidence of qualified expenditures.

What the Next 4 Years Means for Small Business?

Establishing a standard tax deduction that has previously only been available to individuals would allow small business owners to easily obtain tax relief without filing additional forms that document equipment and transportation costs. Expanding healthcare tax credits in the Affordable Care Act for small businesses that employ up to 50 workers and create new federal incentives for local and state governments to streamline the business licensing process is a good start in helping small business save time and money.

William Pirraglia, studioD contributor.

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