10 small business tax deductions to take next tax season
As a small business owner or self-employed entrepreneur, tax season often feels like a storm cloud looming in the distance. But with a little preparation, you can write off or deduct a number of business expenses, reduce your taxable income, and file your best tax return yet.
You work hard for your business income. Now it's time to make it work for you with small business tax deductions. Let's take a look at what small business tax deductions are. Then we'll dive into 10 ways you can take advantage of some great tax breaks.
What's a small business tax deduction?
Running a business results in a whole bunch of business activities. These activities don't happen in a vacuum. They require a facility or location, employees, supplies used for business purposes, and maybe even some business travel. Many of these business expenses are tax deductible and can help you reduce your taxable income, stretch your money farther, and maybe even land a larger income tax return.
Simply put, a small business tax deduction is any kind of business expense that can be taken off of your taxable business income. This effectively lowers how much you’ll be taxed.
For example, let's say your taxable income is $150,000 before business deductions. After you calculate things like office expenses and insurance, you wind up with $20,000 in deductions. This means the IRS will only tax you on $130,000 of income.
A deduction is different from a tax credit, which is a lump sum taken off your owed taxes. Using the above example, let's say your deductible business expenses have gotten your taxable income to $130,000, and that you owe roughly $22,000 in taxes. If you had a tax credit for $2,000, you would then only owe $20,000 in taxes. Tax credits always come with numerous qualifications, so be sure to ask your accountant if you qualify for any..
Lastly, a deduction is also not to be confused with a tax cut. A tax cut is a reduction in the actual tax rate that a person or business pays. For example, a government tax cut could reduce the rate you pay in your tax bracket from 20% to 15%.
10 small business tax deductions to consider
Every business is different, but regardless of your industry or business structure, there are a number of common deductible expenses you can utilize. No matter the type of business entity you’re running — LLC, S corporation, sole proprietorship, or something in between — these small business tax deductions listed by the IRS are all worth looking into.
1. Insurance premiums
Whether you pay health insurance premiums for yourself or your employees, you can deduct the entire cost of the premiums. This is also true for freelancers and sole proprietors who only purchase health insurance for themselves. So, most small businesses will be able to take advantage of this deduction.
2. Business travel
Many business activities will require travel at some point. If you're traveling to do anything for your business, this is technically business travel, and any expenses accrued as a result can be deducted.
When writing off travel expenses, include any car expenses — rental fees, purchasing price of the vehicle, maintenance, and fuel. When deducting the fuel you can use the standard mileage rate or actual expense method, so be sure to read up on both methods.
3. Retirement plan contributions
Contributions to a retirement account are deductible. Much like employee healthcare benefits, you can take this deduction whether it's a contribution for your employees or yourself as a sole proprietor.
4. Qualified business income deduction
The 2018 tax bill, called the Tax Cuts and Jobs Act, allows for qualified business income to be deducted at 20%. This means you have the opportunity to deduct up to 20% of your qualified business income, reducing your taxable income. Your qualified business income includes almost any income your business generates, minus certain interests and investments as listed by the IRS.
There are income limits for both single-filers and those with a pass-through business, or a business whereby profits, losses, or deductions are passed to shareholders. As your income goes up, your deductible amount decreases. Once you reach $415,000 as a joint filer and $207,500 as a single filer, your deductions are eliminated entirely. Be sure to read up on the latest IRS rules around qualified business income to ensure your business isn't past the income threshold.
5. Social security contributions
Social security contributions aren't deductible as an employee. But employers can deduct social security contributions paid on behalf of employees.
6. Home office deduction
If you're running a business out of your home or you're a freelancer working from home, you can take advantage of the home office deduction. There are a few avenues to choose from with this deduction: the regular method (also known as the actual cost method) or the simplified option.
The simplified method is the easier of the two and involves deducting only the square feet for business use of your home at a rate of $5 per square with a cap of 300 feet. It also allows for the deduction of your entire mortgage interest as long as it's your principal place of business as well.
The regular method looks at the same factors as the simplified method, but is percentage-based, factoring in how much of your house is used for work and which elements are applicable to the performance of work duties. For example, if you installed flooring or painted a room for work purposes, you could use the regular method to deduct these costs. This can allow for a larger deduction than the simplified method, but is also more granular and more time-consuming to calculate as a result.
7. Office space rental
Any kind of business property or office space rental is also deductible. Unlike the home office deduction, your entire rent is deductible and requires no calculating. You can also deduct any monthly utility costs you pay on your office space.
8. Marketing and advertising deductions
Marketing and advertising can be costly. Fortunately, they can also both be deducted. If you've purchased business cards, freelance marketing help, or any business assets related to advertising or marketing, it's a deduction.
9. Business taxes
Various types of taxes can actually be deductible, including your paid portion of employment tax, real estate tax, and even sales tax. For a full rundown, be sure to check with the IRS. And when in doubt, contact a tax consultant or accountant.
10. Miscellaneous business costs
In addition to the above deductions, there are a number of miscellaneous business costs you can deduct, as well. These include:
- Property taxes: Property taxes, much like mortgage, can be deducted.
- Business meals: Just like travel expenses, a percentage of business meals can be deducted in many cases. If a member of the company or a client is present, the meal isn’t excessive, and the food isn’t part of an overall entertainment cost, you can deduct up to 50% of the bill. Keep those receipts!
- Entertainment expenses: Entertainment expenses were deductible until 2018. Now, only meals and drinks that pertain to entertainment can be deducted.
- Office supplies: Office supplies can add up quickly. Fortunately, they can all be deducted from your taxes. Be sure to keep receipts handy and track all spending.
The above list is by no means exhaustive. If you're looking at your books and wondering if something is deductible, research that specific case. It could be a business tax deduction waiting to happen.
Make this your best tax year yet
Tax season doesn't have to be doom and gloom for businesses. Yes, running a business is costly. But the many tax deductions listed above exist to help you recoup expenses through a lower taxable income.
Working with a tax professional will ensure you're current on tax laws and able to find every deduction possible. That said, it's never too soon to start stockpiling receipts for the deductions you can likely take this year. With this knowledge, you can make this the best tax year yet.