Are you confident you are doing everything to minimize taxes for your business? One of the best ways to reduce tax liability is to ensure you are claiming all tax deductions available.
Tax Deduction: An expense subtracted from your taxable income to reduce the amount subject to tax.
- The expense must fit the IRS criteria of a tax deduction.
- A deduction should not be confused with a tax credit.
- A tax deduction reduces taxable income.
- A tax credit reduces the amount of taxes owed.
Here is a List of 8 Small Business Tax Deductions:
1. Qualified Business Income Tax Deduction
Tax Reform created a new deduction for pass-through business owners. It is called the Qualified Business Income Deduction, also called a Section 199A deduction or QBI deduction. According to the IRS, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted.”
This deduction, in certain situations, may provide up to 20% tax deduction on qualified business income for eligible partnerships, S corporations and sole proprietorships. For taxpayers with taxable income exceeding $321,400 for a married couple filing a joint return, or $160,700 for all other taxpayers, the deduction is subject to limitations.
These limitations include:
- Whether the business is classified as a service trade or business
- Taxpayer’s taxable income
- The amount of W-2 Wages of the business
- Unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business
2. Section 179 Depreciation Deduction
In 2019, businesses may deduct up to $1.02 million of cost of qualifying property placed in service during the given tax year. In addition, as a business owner, you may purchase up to $2.55 million in business property qualifying for the Section 179 deduction each year before the benefit is phased out.
Example: ABC Corp. spends $400,000 on equipment and off-the-shelf computer software equipment in 2019. The business can deduct $400,000 this year on those purchases. To qualify for this Section 179 tax treatment in 2019, the equipment or software must be purchased and placed into service by December 31.
3. Bonus Depreciation Tax Deduction
Tax Reform allows businesses to fully expense certain capital expenditures instead of depreciating them over several years.
Examples of eligible expenses are:
- • Office furniture
- • Equipment
- • Machinery
- • Computers
- • Software
These expenditures may be fully expensed starting with business assets placed in service after September 27, 2017. Bonus depreciation will begin phasing out for assets placed into service after December 31, 2022.
4. Meals & Entertainment Deduction
Business owners may deduct 50% of food and beverage related to operating a trade or business, with a couple conditions:
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer is present when the food or beverages are furnished.
Note: Expenses related to entertainment, amusement or recreation no longer fall under the 50% deduction. The Internal Revenue Service (IRS) will not allow the entertainment disallowance rule to be circumvented through inflation of food and beverage costs.
Exception to the Rule: Expenses related to business meetings for employees, stockholders, agents or directors are fully deductible. Therefore, entertainment expenses related to meetings, activities, or events for the benefit of employees are fully deductible. This may include events such as shareholder meetings, holiday parties, and summer outings. If these events remain as COMPANY ONLY functions, these rules should apply.
5. Health Insurance Expenses
For S-Corporations, owner-employee taxpayers, who own more than 2% of the S-Corporation stock, may deduct 100% of the amount paid for medical insurance for himself or herself, a spouse and dependents under the health plan established by the S-Corporation.
A more than 2% shareholder’s wages from an S-Corporation are treated as the shareholder’s earned income. A deduction for health insurance premiums may not exceed an individual’s earned income from the trade or business. Certain exceptions apply to group health plans.
6. Vehicle & Travel Tax Deductions
Automobile usage tax deductions are some of the most scrutinized deductions on business filings, but it may be worth it if you travel frequently for work. There are two ways to claim this deduction:
- Standard Mileage Rate. Total all the miles driven for your business and multiply by the IRS’s standard deduction rate to figure out your deduction. As of 2019, the standard mileage rate is 58 cents per mile.
- Actual Car-related Expenses. This option may entail a little more work. If you keep very detailed records throughout the year, you can add up how much your car depreciated and what you spent on gas, repairs, tires, tune-ups, car insurance and registration fees. That will be your deduction, instead of the mileage.
The option you choose depends on how economical your car is, how much it cost you to drive it throughout the year and how well you documented your car-related expenses.
For a travel trip to qualify for a travel deduction, it must meet the following criteria:
- Your responsibilities during the trip must keep you away from your regular place of business for substantially longer than a regular day’s work.
- You need sleep or rest to meet the demands of your work while away.
As with all these deductions, it is important to keep receipts and records of all business travel expenses you plan to deduct in case of an audit.
7. Home Office Tax Deduction
You may deduct expenses for the business use of your home, which includes utilities, mortgage interest, insurance, repairs and depreciation.
Note: This deduction allows business owners to deduct $5 for every square foot of your home office, up to a maximum of 300 square feet.
Office supplies is also deductible such as printer ink, pens, software, a new laptop and much more.
8. Charitable Deductions
Your business may donate to charity and take a deduction for it. In general, contribution to charitable organization may be deducted up to 60% of adjusted gross income, however, there are limitations. If you donate property, you may deduct the fair market value of the it.
Note: Some of the tax deductions in this list may not be available to your business so consult with your CPA before claiming a deduction on your tax return.
What is a standard deduction? The standard deduction is a deduction of a fixed dollar amount, adjusted each year for inflation, reducing a taxpayer’s taxable income.
Standard Deduction
- Married Filing Joint or Surviving Spouse – $24,400
- Head of Household – $18,350
- Married Filing Separately or Single – $12,200
- Age – If you are age 65 or older, you may increase your standard deduction by $1,600 if you file Single or Head of Household. If you are Married Filing Jointly and you OR your spouse is 65 or older, you may increase your standard deduction by $1,300. If BOTH you and your spouse are 65 or older, you may increase your standard deduction by $2,600.
- Blindness – If you are legally blind, you may increase your standard deduction by $1,650 if filing Single or Head-of-Household. If you are Married Filing Jointly and you OR your spouse is blind, you may increase your standard deduction by $1,300. You may increase your standard deduction by $2,600 if BOTH you and your spouse are blind.
Proactive Tax Strategies
Partner with an experienced team of CPAs to help you create saving opportunities both now and in the future. We will work closely with you to evaluate your situation and recommend the best approach to lower the current year’s tax liability and maximize savings from allowable deductions, so you can focus on growing your business.
