One of the most important means through which governments worldwide support small businesses come through targeted tax breaks and credits.
Governments can offer a cornucopia of various small business boosts through taxes and credits. Some of the small business tax deductions help small businesses across the board while others target certain sectors determined to be in need of more help.
With the wide range of potential benefits, naturally many get confused about which may apply to their specific circumstances. The list below only covers those most often used. For a full accounting of all potential breaks, small business owners should contact their accountants.
Also, remember that tax laws and regulations remain in constant flux. What holds true for 2020 may change for 2021.
Getting Every Possible Deduction Requires Planning and Dedicated Effort
Obtaining the full slate of possible small business text deductions requires work, even under the guidance of an accountant. Experts suggest that business owners and appropriate staff have a game plan on how to account for every opportunity.
Traditional accounting and records practice rely on meticulous collection of receipts and other information. Staff must ensure that records related to tax deductions get filed promptly and organized into a system that anyone else on staff can understand.
Many small businesses have found that the best invoicing apps and other software programs have features that streamline record keeping. Artificial intelligence functions connected to these programs can automatically categorize information into the right silos. They can even create charts and graphs when needed.
Special Changes to Remember From the Tax Reform Act Passed In the United States
The Tax Cuts and Jobs Act of 2017 (TCJA) by itself served as a strong net gain for most small business owners, according to Business.com. Businesses saw the federal government roll back taxes overall while also providing targeted breaks that helped small companies in areas where they needed the most help.
Small businesses received help in several key areas. Critically, most small businesses saw their tax rates drop. Other key changes include rises in some key depreciations. Overall, most businesses have expressed satisfaction with the cuts alongside discouragement that the breaks have a sunset date in the mid-2020s.
Qualified Business Income Deduction
The drop in the corporate tax rate to 21 percent has brought tremendous benefits to all businesses and has helped to fuel rapid growth in most of the US over the past year. Now small businesses, such as LLCs, partnerships, and sole proprietorships, may also qualify under certain conditions for an additional 20 percent deduction by using the Qualified Business Income Deduction.
While the deduction remains subject to some restrictions that will prevent some businesses from participating, according to the IRS, a business can “deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.”
Another change that can affect small businesses comes from another aspect of the TCJA, Opportunity Zones.
Opportunity Zones use a special tax incentive to spur investment into areas selected by state governors as struggling economically, but otherwise ripe for development. Investors who meet federal qualifications can defer tax on almost all capital gains earned in opportunity zones.
Almost all Opportunity Zones are located in struggling inner-city and rural areas.
While the taxes must ultimately be paid, investors and businesses see gains in two ways. They can reinvest gains into Opportunity Zone investments to build them more quickly. Also, inflationary activity will decrease the real value of the taxes paid when deferred over years.
Depreciation Related Changes
Many of the key changes in tax reform that benefit small businesses came in increased depreciation write-offs.
Depreciation refers to the loss of value in assets as they age. Tax law typically allows businesses leeway to write off the depreciation of certain assets. Recent changes in the tax code created by the TCJA have expanded a number of categories where small businesses can claim credit against their taxes. These include:
- 100 percent expensing for business property bought and used between September 27, 2017, and prior to January 1, 2023. This decreases by 20 percent per year until January 1, 2027. Congressional action could extend this cut, amend it, or also make it permanent.
- Businesses can deduct more from purchases of qualified assets. The TCJA raised the deduction maximum from $500,000 to $1 million. The phaseout threshold also rises from $2 million to $2.5 million. Qualified assets include machinery, equipment, store-bought software for computers, and some improvements to nonresidential real property. The TCJA expanded the list of acceptable improvements
- Depreciation limits for passenger vehicles for business use increased, including for luxury automobiles, such as those used by ride-sharing entrepreneurs in major cities.
- Computers and other digital equipment were removed from the category of listed property, removing a number of restrictions on their depreciation qualification.
These changes will open the door for many businesses seeking to modernize or expand. Numerous areas that have lagged in seeing positive development should start to see accelerated growth.
Though the TCJA provided a number of areas where small businesses could see tax advantages, an array of benefits not connected to tax reform can also help.
While TCJA created or expanded a number of deduction opportunities, many more possibilities exist that were created before or after the passage of tax reform.
Top Fully Deductible Expenses From Small Business Taxes
Many small business owners remain unfortunately unaware of the tax benefits that can add to their advantage. A large number of these small business gtax deductions cover 100 percent of the cost of certain goods or services purchased in a year’s time.
Personal Expense Deductions for Business
These deductions are specifically for business owners’ personal expenses incurred as part of supporting work and company efforts.
- Self-employed individuals can deduct health care premiums unless their spouse has access to an employer-offered insurance plan.
- Retirement contributions, under certain conditions, are subject to full deductions
- Under certain conditions, those who pay for child care while they work may be eligible for deductions of these expenses. Allowable expenses are limited to $3,000 for one child and $6,000 for two or more.
- While businesses cannot deduct charitable contributions from their tax obligations, business owners can do so from their personal taxes.
Business Expense Deductions
A broad spectrum of business expenses remain fully or partially deductible. Some small business tax deductions support company efforts in fulfilling vital functions. Others target specific expenses that many companies rarely, if ever, will be able to use.
All small business owners should remain familiar with allowable expenses so they can maintain proper paperwork to support deductions throughout the year.
- The cost of advertising and promotion of the business can, under certain conditions, be subject to a full deduction. Covered activities include, but are not limited to paying for certain graphic design services, business cards, launching a website, commencing a social media campaign, and more
- Although adjusted down by TCJA, some business food and beverage costs remain under the category of deductible expenses. In most cases, 50 percent will serve as the limit. When a business provides meals for work-related activities, the limit remains at 50 percent. Food provided for celebrations, however, can be fully deducted
- When education costs enhance skills and capabilities to support the business, a company may be able to deduct. Some programs acceptable to the IRS include seminars and webinars, skills education, subscriptions to trade publications, field-related books, and transportation expenses
- Under some restrictions, businesses can deduct interest. The federal government allows this if 1) the business is legally liable for the debt 2) All parties agree to repayment of the debt, and 3) the debt is a professionally established debt between parties in a “true” debtor/creditor relationship
- Legal and professional fees, such as those paid to accountants, lawyers, or even consultants and technical services, are subject to deduction. Work done for personal reasons faces many more restrictions under federal tax laws.
- While TCJA eliminated the moving expenses deduction for individuals, it left in place potential deductions for businesses moving operations from one facility to another
- Rent paid for a structure used solely for business purposes remains subject to deduction. This, however, does not include rent paid on a home that includes home offices. The IRS has a special deduction under another category for this.
- Small businesses can claim salaries, benefits, and bonuses against their taxes as well. Restrictions on this deduction include LLC members. Also, the salary must be reasonable and for actual work performed
- Federal tax law allows businesses to deduct from their taxes the cost of a wide range of taxes and other fees related to business. These can include, depending on circumstances, state income tax, payroll taxes, property taxes, excise tax, fuel tax, and business license fees
- Businesses can deduct telephone and internet service, but records must make clear a boundary of separation between personal and business use. For example, the cost of one landline in a home-based business cannot be deducted. If a second line is added and only used for business purposes, a company owner can deduct the cost.
This list of available business deductions, while it seems extensive, does not include every possible benefit. For a full list of various and sundry deductions, talk with your accountant.
Self-Employment Tax Deductions
Self-employed individuals who work out of their own homes have access to a range of potential deductions that can offset the cost of doing business.
According to the IRS, self-employed individuals work as sole proprietors and independent contractors, serve as a partner in a business agreement, or in some fashion work on their own. Often, self-employed individuals have to pay higher rates for Social Security and Medicare taxes, but also enjoy a number of deduction opportunities that others lack.
Home Office and Work Space Deductions
Those who use part of their home for business purposes can deduct the estimated or adjusted cost of the space dedicated solely for work. Costs allowed for deduction include those paid for:
- Mortgage or rent
- Property taxes
- Maintenance and repairs
- Other appropriate expenses related to work in the home or on personal property
The IRS allows for two methods of calculating the home workspace deduction. First, one can estimate the percentage that the home workspace takes from the entire house. The more popular and convenient method allows owners to claim $5 per square foot up to 300 square feet. This equates to a 17×17 space.
Personal and Family Health Insurance
As stated before, if the family or individual has no other employer-provided option and also pays for their own health insurance, the premium payments may be covered. The taxpayer in most cases will need to categorize it as an income adjustment, rather than a traditional deduction.
If the business owner’s spouse has access to a plan, however, this action is not allowed, even if the spouse’s plan is more expensive.
Skills Development and Education
In the same fashion as a business owner can recoup educational expenses for staff through deductions, a self-employed individual can as well. The IRS refers to “qualifying work-related education” expenses, which include tuition, books, lab materials, and other necessary items.
This deduction only applies to the skills development needed for the current business. Taxpayers cannot deduct educational expenses for programs that will help them to transition into another form of employment or field of endeavor.
Business Related Vehicle Expenses
The IRS offers two ways in which business owners can deduct for company travel using one’s own vehicle.
An easy way to deduct travel expenses is by applying the IRS standard federal mileage rate. This is calculated yearly to reflect the cost per mile of gasoline, wear and tear, insurance, and other auto expenses. The business can only deduct in this fashion if it uses fewer than five vehicles.
The federal government and others use this as a tax-free reimbursement rate for workers using their own car for travel as well.
The other option lies in deducting each actual expense individually, gasoline, tolls, registration and inspection fees, tires, and all other expenses. This involves more detailed record-keeping and is mandatory when the business uses five or more cars.
Those looking to use this deduction should keep detailed and meticulous paper or digital records related to business travel.
The Best Way to Keep Track of Business Related Deductions
Federal tax deductions for small businesses are designed to provide support for key aspects of how the company is run. Legislators create them in response to common needs in the business community as are usually expressed by trade organizations, chambers of commerce, and others.
A company must, however, work diligently to ensure that each deduction is not only identified, but also backed up with the proper records.
Tracking expenses and keeping records can represent a huge challenge in and of itself. Responsible business owners understand that putting in the work all year to keep records organized and accessible will pay dividends back to the company come tax time.
Many companies keep old fashioned paper books, files, and ledgers. For smaller operations with few clients or customers, this makes sense. If the number of accounts remains low, using traditional forms of book and recordkeeping should not take much staff or owner time. The cost of alternatives may be too high to warrant a switch.
Other companies use computer technology to replace paper. They use spreadsheet and other programs that often come with their desktop or laptop computers. Many businesses only use these programs as an alternative to hard copy record keeping and file storage and do not use additional features that have become available over the past generation.
Digital age options have developed throughout the course of the 21st century. They evolved from simpler programs and have added useful features over time. In many cases, they streamline the process of keeping records on receipts, travel expenses, and other documentation vital for tax deduction and other company purposes.
Advanced Technology Means Advanced Features
The latest evolution in digital record-keeping comes in the form of mobile invoicing and record-keeping apps. The business operates more remotely now than ever before. Owners and staff have always traveled to meet and work with clients and customers. Now, many staff rarely, if ever, work out of an office.
With businesses having so many more moving parts in this era, staff can easily misplace or lose track of paper records.
The best in mobile invoicing and record-keeping apps have features that can help staff and owners to better stay on top of vital records. People on the go can create or scan records into their phones as soon as they are received. Once the phone is in service, the records go into a “depository” with the business servers or, more likely, in the cloud.
Record keeping and invoicing app programs not only categorize and store vital information. They can also store data, conduct analysis, and create easy to digest reports and graphs for organizational use.
Advanced mobile apps that incorporate artificial intelligence-driven features reduce burdens on staff, improve accuracy or records, and, most importantly, store vital information that a business relies upon for tax purposes.
No longer will staff have to sift through hard copy or computer spreadsheet files at tax time. With the click of a button, information is instantaneously accessible and ready to use when it comes time to do company taxes.
The Billdu Difference
Does your small business struggle every year at tax time to amass the needed records to calculate deductions? Has the job grown to the point where it serves as a critical burden to staff?
Mobile invoicing and record-keeping apps from Billdu can serve as a powerful tool to make sure that a business owner and staff keep track of tax, expense, and other business records. Respected as one of the best such services around, Billdu offers a number of other related features all designed to boost business convenience.
These features include invoicing and billing functions that take much of the stress and work out of the process while also often resulting in faster payment from customers and clients.
Check out the website to learn more about the wide spectrum of services the Billdu app offers.