Every small business owner wants to save money — and tax deductions are one way to do just that!
So what is a tax deduction? Tax deductions, or write-offs, directly impact how much you pay in taxes. When you file your taxes, your deductions are subtracted from your gross revenue. What’s left are your taxable profits, and that’s what you’re taxed on. The more tax deductions you have, the less taxes you’ll pay. That’s why write-offs are so important for small business owners.
Here are the 7 most common overlooked expenses that business owners can write off:
1. Qualified Business Income 20% Deduction
The 2018 tax reform law changed how deductions work for most taxpayers — including small business owners. Under the new tax law, most small businesses (sole proprietorships, LLCs, S corporations and partnerships) will be able to deduct 20% of their income on their taxes. Yes, you read that right!
In a nutshell, if you own a small business and it generates $100,000 in profit in 2019, you can deduct $20,000 before ordinary income tax rates are applied.
Be warned, there are a few limits that could prevent you from claiming this deduction. The biggest obstacle is the income limit that applies to some high-income business owners such as lawyers, doctors and consultants. Once your income exceeds $157,500 for single filers or $315,000 for pass-through business owners who file a joint return, this deduction begins to phase out.
You’ll want to reach out to your CPA to see if you’re eligible for this pass-through entity deduction.
2. Professional Services
Most small businesses don’t have in-house accountants or attorneys, but that doesn’t mean they can’t deduct those services. If you hire a consultant to help you grow your company’s outreach, the expenses you pay for those services are deductible. Services such as appraisers, analysts, consultants, and bookkeeping services are all considered necessary expenses of business.
3. Travel Expenses
Most industries offer some form of trade show or professional events where businesses can gather to discuss trends, meet with vendors, or sell goods. If you’re traveling to a trade show, you can take a small business deduction for all your expenses, including airfare, hotels, parking, meals on the road, and automobile expenses – whether you use the IRS standard mileage rate or actual expenses.
As with all deductions, it’s imperative that you keep receipts and records of all business travel expenses you plan to deduct in case of an audit.
4. Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
To qualify you must meet both of the following:
- The business part of your home must be used exclusively and regularly for your trade or business.
- The business part of your home must be:
- Your principal place of business; or
- A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or
- A separate structure (not attached to your home) used in connection with your trade or business.
Check with your CPA or IRS for a list of requirements.
This deduction is an allowance for the cost of buying property for your business. It includes the Section 179 deduction for equipment purchases up to a dollar limit ($1,000,000 million in 2018; $1,020,000 in 2019). Certain other limits also apply. The depreciation category also includes a bonus depreciation allowance, which is another type of write-off in the year costs are paid or incurred. The limit is 100% for property acquired and placed in service after September 27, 2017.
Your CPA should be able to look through your assets and discuss a depreciation plan.
These costs are deductible business expenses only up to 50%, although there are some meal costs that are fully deductible. Thus, a business lunch is half on you and half on Uncle Sam. And the deduction can only be claimed if you substantiate the expense. The costs may not be “lavish or extravagant” and you or an employee of your company must be present at the meal.
7. Educational Expenses
You can deduct educational training that relates to your industry or the skills you need to run your business. You can also write off professional groups, conferences, lectures, classes, and books necessary for your trade.
For tax purposes, the format of the educational experience is less important than how relevant it is to your business.
If you’re having trouble figuring out if something really relates to your business, ask yourself the following questions.
Will learning about this topic:
- Strengthen an existing skill set I have?
- Give me a new skill set that will expand my business offerings?
- Help me understand my customers better?
- Help me run my business more effectively?