What Can I Write Off As A Small Business Tax Deduction?
According to a recent study done by QuickBooks, 1 in 10 businesses don’t take advantage of tax deductions! Are you getting the most out of your potential tax deductions, or are you letting easy money pass you by?
We get it. With all of the recent changes to the tax code, the whole concept of business tax deductions can be daunting and confusing. But you work hard to make your small business profitable and successful — and we want you to be able to keep your business that way. That’s why we’ve compiled this comprehensive list of small business tax deductions.
Learn about these key deductions so you can stop asking how much you owe and start asking how much you’ve saved.
Table of Contents
What Do New Tax Laws Mean For Small Businesses?
In December of 2017, Congress signed the Tax Cuts & Jobs Act (TCJA) which went into effect January 1, 2018. Many reporters and tax professionals consider this the biggest tax reform in decades, and most ordinary people are still trying to figure out exactly what all of these changes mean, both for themselves as individual tax payers, and for the businesses they run.
On their official website, the IRS says:
The IRS is working on implementing the Tax Cuts and Jobs Act (TCJA). This major tax legislation will affect individuals, businesses, tax exempt and government entities.
You will find a publication called Tax Reform: Basics for Individuals and Families on their site as well, and that’s all well and good, and but what about small businesses?
According to QuickBooks’ recent study, small business owners have mixed feelings about the TCJA tax reform. 32% of business owners think the reform will benefit their business, while 19% said it will poorly affect business — and 22% have heard about the changes to the tax laws but have no idea what the impact will be.
Whether the tax reform is for the better or worse, we can shed a little light on what these laws actually mean. Here is a brief overview of the main tax reform changes that will affect small businesses and their deductions this tax season:
Huge Cut In Corporate Tax
The corporate tax rate went from 35% down to 21%.
20% Qualified Business Income Deduction
There’s good news for small businesses too. Certain types of small businesses, such as sole proprietorships, S corporations, and partnerships, may qualify for a 20% income deduction. Since with these types of businesses the business income “passes through” to the individual business owner’s income for tax purposes, the tax reform allows these individuals to deduct 20% from their total income.
There are many rules and regulations about how this tax break works, so talk to your accountant to see if you’re eligible.
You can now depreciate 100% of certain expenses instead of only 50%. The IRS says:
The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50 percent.
This applies to fixed assets like:
This law also lets you depreciate farm equipment over five years instead of seven.
Contact your accountant for all of the details and to ensure you are eligible for bonus depreciation before filing.
No More Entertainment Deduction
In past years, business owners could deduct 50% of entertainment expenses related to their business. Now you can no longer write off entertainment expenses and many people are still unclear on whether or not you can continue deducting meals.
Paid Family/Medical Leave Deduction
For 2018 and 2019, businesses offering paid family leave or paid medical leave to their employees can qualify for a deduction.
While this isn’t an exhaustive look at the TCJA reform by any means, these are some of the most pertinent changes to what your business is potentially allowed to deduct for 2018.
Continue reading to learn exactly what deductions your business may be eligible for.
What Is A Deduction?
The one thing that hasn’t change is the nature of deductions. A deduction is a business expense that you can use to reduce your total taxable income. According to the IRS, expenses that qualify for deduction must be “both ordinary and necessary.”
The IRS further explains:
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
So what does this mean for you? Basically, you can save a lot more money than you might think.
Small Business Tax Deductions
Here is a list of some of the most common tax deductions available for small businesses. Before reading anything further, note that not every business will be eligible for every type of deduction. To check if you’re eligible for a deduction, double-check IRS regulations and always consult with your accountant.
- Qualified Business Income Deduction: As we mentioned earlier, sole proprietors, S corporations, and partnerships with pass-through income may be eligible for a 20% deduction on their total income.
- Car & Truck Expenses: Car and truck expenses can be calculated in two ways: by the standard mileage deduction or by actual expense cost. You can either track your miles and get 54.5 cents per mile (according to the 2018 standard mileage rate), or you can track vehicle expenses (including gas, oil changes, maintenance and repairs, tires, registration, license, insurance, parking fees, garage rent, etc.). Carefully consider how you use your vehicle to ensure you choose the right method to get the most money back. With either option, keeping good records is imperative.
- Travel: In terms of travel, transportation between your home and a business destination can be deducted. Transportation via car, taxi, train, etc., is only covered if you are traveling from your lodging to a business-related destination. Additionally, lodging can be counted as a write-off, as well as baggage, dry cleaning, and business calls. You can even count purchasing your passport as an expense if it is purchased for a business trip. Keep good records of all this information to ensure you get the right deduction amount. In addition, you can write off any travel arranged for job candidates being interviewed.
- Home Office: If you have a separate space in your home that is exclusively used for business, then you may be eligible for a home office deduction. This deduction is based on the size of the space and can be calculated via a simplified method or on a supplementary tax form. The simplified method multiplies the square footage of your office by $5 for your total deduction. Or you can use the more complex calculation form. To see if you qualify for a home office deduction, consult the chart below (borrowed from the IRS).
- Office Supplies: Office supplies needed to run your business are deductible.
- Tools and Supplies: Additional supplies and tools that are necessary for your business are also deductible. Certain tools, such as computers, cannot be deducted as usual and may need to be depreciated (see section below for more details).
- Repairs and Maintenance Costs: You can usually deduct the cost of repairs and maintenance of property. Learn more about deductions for repair and maintenance.
- Utilities: What’s covered in utility expenses? Heating, telephone services, electricity, sewage, and water are deductible. These costs, as long as they aren’t personal expenses, are deductible.
- Internet Services: You can write off the cost of your internet provider fees.
- Software: If your business requires specific software to operate (like accounting software), you can deduct the software cost or monthly subscription.
- Employee Benefits: You can deduct the following employee benefits in most instances: health plans, sick pay, vacation pay, accident coverage, life insurance coverage, welfare benefit funds, cafeteria plans, adoption assistance, and dependent care assistance. For more specifics, go to the IRS’s business expense deductions publication.
- Employee Wages: As long as you are paying your employees reasonable wages for work or services performed, you can deduct this cost. Certain employee awards can also be deducted, although there is a deduction limit. Determine whether or not you qualify for this deduction.
- Contractor Labor: Independent contractor wages can also be deducted under the same stipulations as employee wages.
- Employee Bonuses: In addition to wages, you can deduct bonuses for employees.
- Employee Education: You can write off education expenses for your employee. You can also deduct the cost of your own education, so long as it is related to your business.
- Retirement Plans: You can write off the cost of your employee’s retirement plans.
- Insurance Premiums: Insurance premiums for fire, storm, theft, accident, loss, liability, and malpractice are often covered as a deduction. Those who are self-employed can also benefit from the added health insurance deduction.
- Taxes: Certain taxes also count as a deduction, believe it or not. For example, real estate taxes and income taxes often count as a deduction. Read here to learn more.
- Legal Fees: Most legal fees are deductible. Examples of common fees include franchise or trademark fees, business licenses, hiring a tax professional, and more.
- Interest: In most cases, you can deduct all interest paid or accrued during a tax year, so long as you are legally liable for the debt. You can deduct a part of the interest if you are only partially liable. Certain types of interest are not accepted, so be sure to learn more about insurance deductions.
- Start-Up Costs: You can choose to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs, so long as they were paid or incurred after October 22, 2014.
- Advertising Expenses: Usually, you can deduct all advertising expenses that are related to marketing your business.
- Research and Experimental Costs: Instead of classifying research costs as a capital expense, you can opt to count these expenses as a deduction.
- Credit Card Fees: Another surprise, you can even deduct credit card processing fees.
What Is Depreciation?
If you read the list above and thought something was missing, you’re not alone. What about machinery and equipment deductions? What about deductions for property?
This is where depreciation comes in.
Depreciation sounds confusing, but it simply entails claiming a deduction over a period of years instead of all at once. This method is usually required for business assets or large expenses, like computers, company cars, office furniture, and property.
Due to the new tax reform laws, you may be eligible for bonus depreciation on certain fixed assets. Read the IRS’s rules for depreciation to see if you qualify for even more savings.
What If I Missed A Deduction?
Now you know that there are dozens of business deductions out there. But what if you missed a key deduction last year, or didn’t take any deductions at all?
You’re not out of luck yet. Some deductions are retroactive, meaning you can have your tax filings reevaluated to include these deductions. Talk to your accountant to learn more.
Feeling overwhelmed yet? That’s okay. This post may contain a lot of information, but that means a lot of savings for you!
As the Tax Cuts and Job Acts continues to be implemented, these new laws will only become clearer and we’ll keep updating this post to make things as easy for you as possible. While this tax reform is still being fully realized, your accountant is your best friend. If you have any questions or concerns about which deductions you are eligible for and which expenses you can write off, talk to your accountant or another tax professional for the most accurate business advice.
To see if you are ready for other aspects of the tax season, check out our 2018 Tax Prep Checklist. For additional help filing your taxes, read our article How to Get the Most Out of Your Accounting Software This Tax Season. Happy filing!