8 Ways to Slash the Taxes You Pay

8 Ways to Slash the Taxes You Pay
There are ways you can slash your taxes. You could reduce your income which is something that most people opt not to do. Or you can increase your deductions and credits to bring your taxable income down. The following is a list of some of the most lucrative business tax deductions that you could be claiming:
Our complicated tax legislation often offers a choice in the way a particular event is to be treated e.g., depreciation and business losses. Instead of just picking an option, or blindly doing what you’ve ‘always done’, consider your situation and the effect your choice and its timing will have.
Depreciation  (Sec. 179 deduction). If you’re operating at a profit and purchase new or pre owned business equipment or machinery, you may choose to claim the full deduction in the first year of purchase instead of depreciating it over the legislated period. However, to be eligible for this option you must formally make the election on your return, and there are limits, thresholds, and phase outs dependent upon when you bought the equipment and the total value of equipment you buy in any one year. If you discover that your purchases are required to be depreciated, there are sometimes extra deductions available such as the first-year bonus depreciation deduction in effect though 2012 which allows you to depreciate an additional 50% or 100% during the first year.
Net operating losses (NOLs). Business losses may be deducted against your other income, subject to rules relating to whether your venture is considered a business or a hobby. If you’re eligible to deduct your business losses, you may apply it against any of the years started from two years prior to twenty years in the future. Simply altering the timing of your deduction can potentially have an enormous effect if your income fluctuates widely, or if the legislated tax rates change.
Note: These elections (and others not mentioned here) are subject to terms and conditions. Most will have a set date by which you must formally make the election so make sure you comply with these timeframes to avoid disappointment.
While deductions are great, they only save you as much money as the tax would be on that amount. A credit however, reduces your tax bill dollar for dollar. E.g., If you’re in the 28 percent tax bracket, a tax deduction of $500 gives you a benefit of $140, while a tax credit of $500 gives you a benefit of $500. As you can see, the impact on your tax bill due from taking a tax credit is much larger than that derived from a tax deduction.
To be entitled to claim your business expenditure, you have to be able to prove that you actually spent the money, and such proof must be in a form acceptable to the IRS. Receipts should always clearly describe the goods or services you buy, as well as the amount spent, the date, and any other pertinent information. In most cases, a bank or credit card statement will
not suffice.
Multi-purpose expenditure can sometimes be a little tricky to account for when it comes to your tax return. If you rent a distinct, separate business premises, it’s easy enough to demonstrate the rental fees paid, but if you use a small area of your own home (such as the basement, garage, or a spare room) you’ll have to take extra care calculating deductions. Typically, so long as you are able to prove the genuine business use of part of your home, you are entitled to claim a deduction for a portion of home-related expenses such as interest on the mortgage (or rent), insurance, utilities, repairs and maintenance costs. The total of these types of expenses are apportioned to take into account business and private use, and such apportionment must be reasonable and justifiable to the IRS. One of the most common methods is to base your calculations on the percentage of space used for business/private purposes.
There are two potential methods of claiming automobile expenses. It’s in your best interests to record details and evidence of both the standard mileage and the actual expenses methods, and calculate your potential deduction under both. Then, choose the method which will give you the biggest deduction—provided your choice complies with the IRS requirements. In 2012, the standard mileage rate is 55.5 cents per business mile driven, the same rate that was in effect for the second half of 2011.
Try to keep your personal matters and your business matters separate. Paying for business expenses out of personal funds and bank accounts doesn’t negatively affect deductibility, but it’s much, much easier to keep track of, and ensure you’ve claimed a deduction for all you’re entitled to if every transaction in your bank account is recorded and accounted for.
Just because you’re in business doesn’t mean you can automatically spend up big at the fanciest restaurant in town. Meals classified as “business-related entertainment” are a potential deduction, but they are limited to 50% of the cost under the actual cost or standard meal allowance method. If you’re required to travel away from home for business purposes you also may be entitled to claim for meals while you’re away. As with all deductions, keep accurate records to substantiate any claims you make. Following the above advice could help you to keep hundreds, or even thousands, of your hard-earned dollars in your own pocket—not the IRS’s.