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2 December 2019 / Small Businesses

The Complete List of Tax Deductions for Small Business

2 December 2019 > Small Businesses

Whether you’re incorporated or running a sole proprietorship you probably hire an accountant to prepare your income tax return. However, it’s important to know what tax deductions are available so you can save the right receipts and make wise choices. You don’t want to wait until April to find out some of your expenses aren’t deductible after all. Equally, you don’t want to discover missed deductions at the last minute and scramble to recover lost receipts.

To lower your taxable business income as much as possible, familiarize yourself with the following list of business tax deductions:

1. Home office deduction

While employees are no longer eligible for the home office deduction, self-employed people and small business owners are still eligible. According to the IRS, your home office qualifies as deductible when you meet two requirements:

  • The area is used “exclusively and regularly for your trade or business.” In other words, your office must be dedicated to business and not movie nights or posting on Facebook (unless posting on Facebook is part of doing business)

  • Your home is your principal place of business

When you qualify for the home office deduction, you also qualify for deducting a portion of utilities and other household bills. However, be careful with this deduction and verify that your claim is legitimate. If your office doesn’t have walls or some kind of partition, or if you need to walk through your office to get to other areas of the house, it’s better not to claim the home office deduction.

2. Vehicle-related expenses

Small businesses can deduct certain vehicle-related expenses on their tax return including depreciation of the vehicle, lease payments, gas, tires, repairs, insurance premiums, and registration fees.

The standard mileage rate for 2019 is 58 cents per mile for business purposes, 20 cents per mile for medical or moving purposes, and 14 cents per mile while driving for a charitable organization.

3. Holiday parties and business meals

Entertainment, amusement, and recreation expenses are no longer deductible, but some related deductions are still available. For instance, business meals can be deducted at 50% of the cost as long as the food isn’t considered “lavish or extravagant.” Holiday parties are fully deductible and meals employees buy during business travel are 50% deductible. Until 2025, employers can deduct employee meals if they came from an employer-operated cafeteria.

4. Depreciation

If you’ve been missing the depreciation deduction, it’s back. Qualifying assets are those with an expected lifespan of 20 years or less. This includes machinery, computers, appliances, and furniture.

Qualifying assets purchased (and put into service) after September 27, 2017 are eligible for a 100% bonus depreciation deduction. After 2022, the deduction will decrease by 20% until it’s gone.

5. The section 199A deduction (qualified business income deduction)

The qualified business income (QBI) deduction is available to some sole proprietors, partnerships, and S corporations along with certain trusts and estates.

This deduction is one of many created by the 2017 Tax Cuts and Jobs Act.The qualified business income deduction allows pass-through businesses to deduct the cost of following:

  • Up to 20% of qualified business income

  • 20% of qualified real estate investment trust (REIT) dividends

  • 20% of qualified publicly traded partnership (PTP) income

The IRS FAQ page states that the QBI is subject to limitations that include the type of business, amount of W-2 wages paid by the business, and the unadjusted basis immediately after acquisition of qualified property held by the business. If the taxpayer is a patron of an agricultural or horticultural cooperative, the QBI deduction might also be reduced.

S corporations and partnerships don’t qualify for this deduction directly. The shareholders or partners are responsible for claiming their deductions.

QBI income thresholds

For doctors, lawyers, and other professionals to qualify, they must earn $207,500 if single or $415,000 if married and filing jointly.

Who is not eligible for the QBI deduction?

According to the IRS, income earned through a C corporation or by providing services as an employee is not eligible for the QBI deduction.

6. Employee family and medical leave tax credit

A new tax credit was established to encourage small businesses to help employees with family and medical leave needs. If your business offers paid family or medical leave, you’re entitled to this credit for the 2019 tax year.

Your business can deduct about 12.5% of the wages you pay to your employees while they’re on leave. Your credit increases the more you pay your employees but caps off at 25%.

How to qualify for this credit

To qualify for the family and medical leave credit, your written paid leave policy must grant full-time workers a minimum of two weeks paid leave each year. Part-time employees must be granted a prorated amount of paid leave. Your paid leave policy must also pay employees no less than half their normal wages.

Your paid leave policy must include the above requirements in writing and must have been communicated to your employees before December 31, 2018.

Qualified and unqualified employees

Qualified employees are workers who have been employed for at least one year. However, you can’t claim the 2019 credit for employees who earned more than a certain amount the previous year.

7. Travel expenses

Your small business can deduct travel expenses when those expenses are necessary for business. However, you can’t deduct lavish or extravagant expenses. For instance, if you chartered a private jet to fly from Miami to New York for $300,000, that would be considered extravagant and not an eligible deduction.

Deductible travel expenses include:

  • Plane, train, or bus tickets

  • Fares for a cab or shuttle between the airport and your hotel, to and from your work location, etc.

  • Meals and lodging

  • Laundry and dry cleaning

  • Tips paid to necessary services (like laundry)

  • Anything other necessary costs incurred while doing business

The IRS says travel expenses for conventions and trade shows within North America are deductible when you can prove your attendance benefits your business.

8. Employee retirement plan contributions

Retirement plans are an employee benefit, but they also benefit your bottom line. Your contributions to employee retirement plans are deductible as a business expense. You might also qualify for a credit of up to $500 for expenses incurred in the process of setting up and maintaining employee retirement plans for the first three years.

According to Fidelity.com, simple IRA and SEP IRA retirement plan contributions are deductible business expenses.

9. Education

You can deduct the cost of educational expenses when that education adds value to your business or will increase your expertise. For example, if you’re a tax preparer, these 4 IRS approved tax preparation courses are deductible.

Education expenses can include classes, seminars, webinars, workshops, conferences, and books.

10. Legal fees

Any legal fees you incur that are necessary to run your business are tax deductible. For example, fees paid to your lawyer, accountant, bookkeeper, and tax preparer are all deductible expenses. Accounting software is also a deductible expense.

11. Moving expenses

The Tax Cuts and Jobs Act eliminated moving expense deductions for non-military individuals, however, businesses can still deduct the cost of moving supplies and equipment to a new location. For example, if you moved your office and hired movers to take all your equipment to the new location you can deduct those expenses.

12. Rent paid for your office

If you’re renting an office, your rent is a tax-deductible business expense.

13. Various taxes and licenses

If you qualify, you can deduct certain taxes and licenses related to your business. In addition to state taxes and payroll taxes, you might be able to deduct:

  • Excise taxes

  • Business license fees

  • Sales tax

  • Real estate taxes paid on your business property

14. Miscellaneous expenses

Whether you work at home or in an office, you can deduct phone and internet expenses. However, you can’t deduct your landline if it’s your only line. You can deduct a second landline, however.

Other miscellaneous deductible expenses include advertising expenses, donations to charity, healthcare expenses, child and dependent care (using form 1040).

Keep track of all expenses, even when you don’t think they’re deductible

To reduce your taxable business income as much as possible and maximize your refund, keep accurate records of all expenses and save/print all receipts. Some expenses might unexpectedly fall under a broad category of deductible expenses and if so, you’ll be glad you kept those records.

Ralph Carnicer

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