If you have recently started a small business, take advantage of tax deductions to keep more of your money in your pocket (or reinvested back into your business). Read on to find out what you can write off on your next return.
Entrepreneurship can be a rewarding, profitable challenge. However, taxes are an inevitable factor that can dampen the thrill. Fortunately, the government allows for a number of tax breaks for small businesses that can help bolster your bottom line. The IRS lets you deduct the costs of items and services that are “ordinary and necessary” for your business.
Qualified Business Income
Thanks to the 2018 tax reform law, most small businesses can deduct 20% of their income on their tax returns. So, if you owned a small business that generated $100,000 in 2019, you can write off $20,000 before applying ordinary income tax rates. This tax law can benefit:
- Sole proprietorships
- S corporations
Some high-revenue small business owners may face an income limit that could preclude them from claiming this deduction. The deduction begins to phase out once income exceeds $157,000 for single filers or $315,000 for some business owners who file jointly.
Home Office Space
Transforming a spare room or area in your home into an office space can help you save on taxes. You may be able to deduct $5 for every square foot dedicated to your business, up to 300 square feet. However, you must be using the space regularly and exclusively for business purposes, so the dining room table doesn’t qualify. Certain industries, such as home daycare services, can claim a deduction based on the portion of hours they use their space for the business.
The government understands that you need electricity, internet, phone, water and heat to operate your enterprise. You can deduct a part or all of your utility bills that relate to your business. If you have a home office that takes up 3% of your home’s square footage, Uncle Sam lets you deduct 3% of these expenses.
While you’re racking up mileage on your vehicle to run your business, you might be able to tally up your related costs and write them off on your next tax return. For 2020, you can either deduct 57.5 cents for each mile you drive for business purposes or tally up your actual car expenses. If you’re using five or more vehicles, you’ll have to go the second route.
The IRS provides an extensive list of deductible business travel expenses. A qualifying trip must be necessary for your business and take you away from the area in which your main place of work is located. The trip must also take longer than a normal workday and require rest or sleep while you are away. You can write off:
- Rental car expenses
- Airfare or fare for trains and buses
- Taxis (including Uber and Lyft)
- Shipping of baggage or display materials to and from your work locations
- Meals up to 50% of unreimbursed costs
- Laundry expenses
- Computer rental fees
- Tips paid for any of these services
Business Debt Interest
Generally, you can deduct some or all interest you pay or accrue on any business-related debt. You must be legally liable for the debt, and you and the lender must have a true debtor-creditor relationship. Also, you and the lender must intend the debt to be repaid. If the loan is partly business and personal, you’ll need to divvy up the interest accordingly.
Learning and improving skills is part of growing a business, and the IRS lets you deduct any expenses you incur in the process. You can write off tuition, books, supplies and transportation to and from classes, qualifying as work-related education expenses. Be aware that the expenses must be to maintain or improve the skills you need in your current work, not to change careers. Consult IRS Publication 970 for details.
Publications and Dues
Purchasing trade, technical or professional publications may pinch your wallet, but Uncle Sam lets you deduct their cost come tax time. You can also write off dues paid to trade associations and professional organizations as long as their purpose is not to entertain. Further, donations to business organizations may be deductible.
Traditional office supplies, including copy paper, pens and printers, are fully deductible expenses. You can also write the purchase of a new computer, accessories and software. More than likely you use your smartphone for business, so you can deduct the cost of that as well.
The cost of your business insurance is deductible. The IRS allows this if the insurance is for your business, profession or trade. You can also write off renter’s insurance expenses as part of your home office deductions if you have a home office or dedicated area to run your business.
If you are self-employed and pay for your own health insurance, you may be able to deduct all of your health, dental and long-term care insurance premiums. You can also write off premiums paid to cover your spouse, dependents and children under age 27 at the end of the year. Calculate this deduction using IRS’s Self-Employed Health Insurance Deduction Worksheet in Publication 535.
Shield some of your income from immediate taxation with an individual 401(k). Just as with a typical employer-sponsored setup, contributions to a solo 401(k) are pretax. You can stash away the lesser of 100% of earned income or $57,000 ($64,500 for ages 50 and older) each year and deduct the amount on your tax return.
Final Words on Tax Deductions
Although taxes will always be a part of running a business, tax laws change often. Keep up with the latest deductions and other information for small businesses at IRS.gov. Please consult a tax specialist to see how these suggestions apply to your situation.