For many small business owners, dealing with taxes is one of the most challenging aspects of entrepreneurship – especially when tax forms, rules, rates and deductions seem to change every year.
The good news is after the major changes that resulted from the Tax Cuts and Jobs Act of 2017 (TCJA), there aren’t any significant changes to the small business tax code for the 2019 tax year. You can still take advantage of the usual tax write-offs to reduce the amount you owe.
Are you taking advantage of all of the small business tax breaks you’re entitled to claim? Here are a few common ones you might be forgetting.
Typical business deductions
The type of small business tax breaks you’re eligible to claim depends on the type of business you’re operating. Here are some common small business deductions.
- Advertising. This includes various methods for promoting your business, including business cards and flyers, as well as print and digital marketing campaigns.
- Car and truck expenses. If you use a vehicle solely for business, you can deduct 100% of the cost of operating that vehicle. If you split your miles between work and personal trips, you can only deduct the business portion of your expenses.
- Depreciation. If you purchase real estate, equipment, or furniture for your business, you write off the cost of the property over its useful life rather than deducting the entire cost in one year. This is known as depreciation.
- Insurance. You can deduct the premiums paid for liability, fire, malpractice, workers' compensation and other types of insurance that are ordinary and necessary for your business.
- Interest. If you pay interest on a business credit card, line of credit or mortgage on business property, you can generally deduct the interest portion of your payment.
- Legal and professional services. You can deduct the fees paid to accountants and attorneys as long as their services are directly related to operating your business.
- Meals. You can deduct 50% of the cost of business meals, as long as you or an employee are present, and you provide the meal to a current or potential customer, client, or business contact. The food and beverage can’t be considered lavish or extravagant.
- Rent. If you rent an office space, retail location or other property for your business, your rental costs are fully deductible.
- Travel. You can deduct flights, lodging and other transportation costs while on a business trip. You can also deduct 50% of meals while out of town for business.
- Utilities. This includes the cost of electricity, water, heat, sewer, internet and phone.
- Wages. If you hire employees, you can deduct their salaries and wages, along with benefits such as health insurance and retirement.
9 overlooked tax breaks for small businesses
Many of the above expenses are easy to track and write off on your return. But several less common deductions can deliver big savings at tax time. Are you taking advantage of these lesser-known small business tax breaks?
Business owners often spend a lot of money before making a dollar of income. These costs can include performing product or market research, looking for office space, advertising your business launch, leasing property, hiring employees and more.
You can generally deduct up to $5,000 of startup costs in the year your business begins operating. Any startup costs that can’t be deducted right away get capitalized and amortized (i.e., written off) over 15 years.
Health insurance premiums
Business owners can deduct the cost of health, dental and long-term care insurance premiums paid for themselves and their family members. How and where you claim the deduction depends on the type of return you file for your business.
- Self-employed individuals, sole proprietors and owners of single-member LLCs deduct their health insurance premiums on Line 16 of Schedule 1.
- Partnerships and LLCs filing Form 1065 include the health insurance premiums on each partner’s Schedule K-1. The partner can then deduct the premiums on Schedule 1 attached to their Form 1040.
- S corporations that provide health insurance to shareholder-employees who own more than 2% of stock in your S corp can take the deduction on Schedule 1. The employees include the premiums in their W-2 wages.
- C corporations deduct premiums paid for shareholders and employees as a business expense on Form 1120.
Small business owners have several options for saving for retirement and helping employees do the same. And you can deduct both the cost of providing these benefits, as well as your contributions to the plan.
Here are a few options you might consider:
- Simplified Employee Pension (SEP). You can contribute up to 25% of your net earnings from self-employment, up to a maximum of $57,000 for 2020.
- 401(k). You can contribute up to $19,500 of your salary to a 401(k) for 2020, plus an additional $6,500 if you’re age 50 or older.
- Simple IRA. You can contribute up to $13,500 to a SIMPLE IRA for 2020, plus an additional $3,000 if you’re age 50 or older. If you have employees, you can make either a 2% fixed or a 3% matching contribution to the employee’s account.
If you give gifts to clients or other business contacts, you can deduct the cost of those gifts. But the IRS limits your deduction of business gifts to no more than $25 per person, per year. Incidental costs, such as engraving, packaging and shipping the gift aren’t included in that limit. Gifts of $4 or less, such as pens or notepads with your business name on them, also don’t count toward that limit.
If the gift can also be considered entertainment, such as tickets to a concert or sporting event, then it’s not deductible.
Family medical leave
If your business provides paid family and medical leave to employees, you may be able to claim a tax credit on your 2018 and 2019 returns. Unfortunately, the credit expired Dec. 31, 2019, so you won’t be able to take advantage for 2020 returns. But you can still claim the credit on your 2019 return if you qualify.
Here’s how it works: The Employer Credit for Paid Family and Medical Leave is worth a percentage of the wages paid to the employee while on leave, for up to 12 weeks per year. According to IRS rules, that percentage starts at 12.5% and can go up to a maximum of 25%. The credit increases as wages paid to employees while on leave exceed 50% of their normal wages.
To qualify for the credit, you need to have a written family and medical leave policy in place that provides at least two weeks of paid leave to full-time employees and pays at least 50% of the employee’s regular wages while they are on leave. For more information on this credit, check out IRS Publication 5327.
Research and development
The Research and Development (R&D) tax credit is an incentive for U.S. companies to increase their spending on research and development activities. If your business spends money on attempts to develop new or improved products or processes, you may qualify for the credit.
There are two ways to calculate the credit, but most small businesses use the Alternative Simplified Credit (ASC) method.
ASC method Under the ASC method, the credit is 14% of your company’s current-year qualified research expenses that exceed 50% of your average qualified research expenses for the past three years. If your business didn’t have research expenses in the past three years, your credit is 6% of your qualified research expenses for the current tax year.
The R&D tax credit has some complicated rules, but don’t let that dissuade you from claiming it if you think you might qualify. Work with a tax professional or check out the IRS Instructions for Form 6765 if you need help.
Work opportunity credit
If you hire employees, you might consider hiring workers who will qualify you for the Work Opportunity Tax Credit. This tax incentive encourages employers to recruit individuals from certain targeted groups, including ex-offenders, veterans, recipients of Supplemental Nutrition Assistance Program (SNAP) benefits, people who live in what’s known as empowerment zones and enterprise or renewal communities, employees referred by vocational rehabilitation services and those who have been unemployed for at least 27 consecutive weeks and received unemployment benefits during at least part of that time.
The amount of the credit depends on the number of hours the employee works and the wages they earn.
- 120 to 400 hours: Maximum of 25% of first-year wages
- 400+ hours: Maximum of 40% of first-year wages
If a customer owes you money and you haven’t been able to collect it, you may be able to deduct it as a bad debt.
Only businesses that use the accrual basis of accounting for their taxes can deduct bad debt expenses. Cash basis taxpayers can’t deduct bad debts because they never included the amount in their income in the first place.
Donations of cash, inventory or supplies and other noncash items are deductible. But corporations are the only type of entity that can deduct charitable contributions on their business tax return. For sole proprietors, members of an LLC, partners and S corporation shareholders, any donations made by the business “pass-through” to the business owner’s individual tax return. Those donations can be claimed as an itemized deduction on Schedule A.
Taking advantage of small business tax breaks can help you save a significant amount at tax time. If you missed claiming one or more of them last year, consider talking to a tax pro about amending a prior year return.