A small business can be rewarding in many ways – particularly if it’s profitable.
Uncle Sam wants you to succeed and provides several tax breaks to help your business flourish.
Here are 12 tax breaks – some new and some old – that even savvy small-business owners and entrepreneurs sometimes forget.
1. New 20 percent deduction
The Tax Cuts and Jobs Act, or TCJA, created some new tax breaks for businesses. For large firms, the corporate tax rate was cut from 35 percent to 21 percent. But many pass-through businesses – such as sole proprietorships, partnerships, single-member limited liability companies and S corporations – are eligible to receive a new deduction of 20 percent of net income.
This tax break is for small business owners whose income “passes through” to their own individual Form 1040 from Schedule C and other assorted tax forms. Note that individuals in certain service businesses, such as finance, law, accounting and consulting firms, get a reduced deduction if their income exceeds certain limits.
“If they make too much money, some people get no deduction at all,” says Judy O’Connor, a certified public accountant with O’Connor & Rodriguez, P.A., in Miami Shores, Florida.
2. Home office
The TCJA eliminates “unreimbursed employee expenses” and other miscellaneous deductions, including the employee’s home office. That occurs when an employee works from home in a designated space for the convenience of the employer.
“Employees who previously wrote off the home office as an employee expense will no longer have that potential benefit available to them,” says O’Connor. “But the home office deduction is still available for people who use a Schedule C, so sole proprietors who are showing a profit can take the home office deduction.”
To claim your home office on your taxes, the IRS says it must be a space devoted to your business and absolutely nothing else.
The deduction isn’t limited to a full room. Your home office can be part of a room. Measure your work area and divide by the square footage of your home.
That percentage is the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc. — that you can claim.
There’s also a simpler way to claim a home office deduction. Consider both the regular and simplified methods of writing off your home office.
3. Office supplies
Even if you don’t take the home office deduction, you can deduct the business supplies you buy. Hang on to those receipts, because these expenditures will offset your taxable business income.
4. Furniture and other equipment
Business owners who make office furniture and equipment acquisitions can deduct up to $1 million worth of purchases under Section 179, up from $500,000 in 2017.
Section 179 is a provision in tax law that enables business owners to deduct the full purchase price of qualified equipment from their gross income. Rather than deducting a certain percentage of the equipment under a multi-year depreciation schedule, as is customarily done, business owners can deduct the full price, as long as they limit expenditures to a spending cap of $2.5 million if it was financed or purchased in 2018. In 2017 the spending limit was $2 million.
A bonus depreciation of 100 percent is also available on certain business assets.
Yes, it’s confusing, but worth looking into if you’re expanding your business. In addition, thanks to the TCJA, business owners can buy new or used equipment, whereas previously only new equipment was eligible for this deduction.
Qualified assets for Section 179 include:
- Machines or equipment purchased for business use.
- Office furniture.
- SUVs, pickups and vans weighing more than 6,000 pounds.
- Certain improvements to the interior of commercial property.
5. Software and electronics
The gadgets that have become indispensable to small business can be written off. These office expenses include software, laptops, tablets, smartphones and other smaller electronics. Items that cost $2,500 or less can be expensed in the year they were purchased rather than depreciated over time, as was the case prior to 2016. Items costing more than $2,500 must be depreciated; consult your accountant to see if the bonus depreciation might apply.
Under Section 179, new computer software a business buys can be fully expensed in the year purchased. The software must be “off-the-shelf,” meaning not custom designed, and available to any consumer in order to qualify for the deduction. It also must be used for income-producing business activity and must be expected to work for more than a year.
Custom or proprietary software is not eligible for the tax break, nor are databases unless they meet certain criteria. Websites are also not eligible at this time.
If you drive for business, the IRS wants to give you some of your money back. You’ll need documentation, so keep a notebook in your vehicle to record the date, mileage, tolls, parking costs and the purpose of your trip.
At the end of the year, you have two choices:
- Total the mileage and add in the tolls and parking to calculate your deduction. Once you have your mileage total, multiply it by 54.5 cents for your 2018 deduction.
- Measure your business usage against your personal driving and deduct that portion of your auto-related expenses. Remember to include gas, repairs and insurance.
If you are leasing, include those payments.
If you are buying the car, factor in the interest on your loan and depreciation on your vehicle.
If your company’s office is at your house, you can deduct the entire business-related mileage, from the minute you pull out of the driveway until you return home.
If your business is not home-based, your mileage meter starts at your first business-related destination and ends at your last. You can’t include the drive to and from home. In this case, try to schedule several business appointments on the same day to allow you to take the mileage between stops as a tax write-off.
Note that if you claimed your vehicle under Section 179 or otherwise depreciated it, you can’t get a deduction for business mileage.
7. Travel and meals
The TCJA eliminated deductions pertaining to “entertainment, amusement or recreation” which business owners could previously write off if they, for instance, took clients out to a sporting event or a golf outing, as long as a business discussion took place before or after the event.
But some deductions related to travel and meals were preserved. As was previously the case, meals are still deductible, up to 50 percent, as long as they aren’t “considered lavish or extravagant.” If you take a client out to a ball game, the ticket costs are not deductible, but if you buy hot dogs and drinks, you can still deduct half that cost.
Lodging and company cars used for business purposes are still tax deductible.
More information clarifying deductible business meals, particularly in instances when food is provided to employees at the office, will be forthcoming from the Department of Treasury and the IRS.
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8. Insurance premiums
Self-employed and paying your own health insurance premiums? These costs are generally deductible, but not in all instances.
“As usual with the IRS, details are important and the IRS instructions should be consulted when claiming this deduction,” says O’Connor.
This break primarily benefits proprietorships, but there are limits. The deduction can’t be more than your business’ net profit. And it’s not allowed if you were eligible for other health care coverage, including that offered by your employed spouse’s medical plan.
You also can include some of the premiums you pay for long-term care insurance for yourself, your spouse or dependents.
9. Retirement contributions
Are you self-employed and saving for your own retirement with a solo 401(k), SEP IRA or Keogh? Don’t forget to deduct your contribution on your personal income tax return.
10. Social Security
The bad news: If you’re self-employed or starting a small business, you have to pay double the Social Security contributions you would as an employee. That’s because federal law requires the employer pay half and the employee pay half. Self-employed workers are both, meaning the total will equal 15.3 percent of your net profits.
The good news: You can deduct half of the contribution on your 1040.
11. Telephone charges
You can deduct the cost of the business calls you make for business from home.
Regular fees and charges on your phone line don’t count toward your deduction. But if you have a second line installed and use it only for business, all of these charges are deductible.
“Most small business owners working from home don’t have land lines anymore,” says O’Connor. “They use cell phones instead.”
If you use your cellphone for your business, you can claim those calls as a tax deduction. If 30 percent of your time on the phone is spent on business, you could deduct 30 percent of your phone bill.
12. Child labor
If you hire your children as employees at your business, you may be able to deduct their salaries from your business income if they meet certain requirements.
Also, there is no Social Security or Medicare tax when you hire your child who is 17 or younger, and there is no unemployment tax (known as FUTA) for children under 21.
This break is available, however, only if you operate as a sole proprietor or as a partnership in which you and your spouse are the only partners. If your business runs as a corporation, then it, not you, is considered the employer and the corporation is not relieved of the tax liabilities.