Paying taxes is arguably one of the least appealing aspects of running a successful small business. However, the good news is that federal tax laws allow you to subtract certain costs, so you only pay tax on your net income.
Common expenses such as office supplies, advertising and business insurance are easy to track and write off on your tax return. But are you taking advantage of other often-overlooked small business tax breaks? Read on to learn more.
If you hire employees, consider hiring ex-offenders. The Work Opportunity Tax Credit encourages employers to recruit individuals from certain targeted groups, including people who were convicted of a felony or released from prison within the past year. Other targeted groups include veterans, recipients of Supplemental Nutrition Assistance Program (SNAP) benefits, employees referred by vocational rehabilitation services and the long-term unemployed.
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
- Less than 120 hours: no credit
Currently, the Work Opportunity Tax Credit is only available for employees who begin work from Jan. 1, 2015, through Dec. 31, 2019.
Deducting health insurance premiums
Business owners and self-employed individuals can deduct the cost of health and dental insurance and long-term care insurance premiums paid for themselves, their spouse and their dependents.
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 don’t deduct their health insurance premiums with other business expenses on Schedule C. Instead, you’ll take the deduction on Line 29 of Schedule 1.
- Partnerships and LLCs that file Form 1065 should include the premiums on the partner or member’s Schedule K-1. On the partner’s individual tax return, the premiums will be included in the partner’s share of income from the business and deducted on Line 29 of Schedule 1.
- More than 2% shareholders of an S corporation should include the premiums in the shareholder’s W-2 wages and take the deduction on Line 29 of Schedule 1.
- C corporations can deduct premiums paid for shareholders, employees and their families as a business expense on Form 1120.
Writing off travel expenses
Do you travel to visit clients or attend conferences and meetings? If your trip involves being away from home long enough to require sleep (generally overnight), you can deduct your travel expenses.
Many business travelers know they can deduct the cost of lodging and airfare, but be sure to track other travel expenses, including:
- Taxi or rideshare service between your home, the airport and your hotel
- Sending supplies needed during your trip, such as display materials
- Parking fees and tolls
- 50% of meals while traveling for business including tax and tip, as long as the meals are not considered “lavish or extravagant”
- Dry cleaning or laundering your clothes while away
- Tips you pay to baggage handlers and other service providers
- Other business expenses while on the road, such as internet charges or renting equipment
If you decide to combine business and pleasure on your trip, you’ll need to allocate your costs between business and personal. For example, say you’re attending a three-night work conference in another city and want to extend your trip by two nights to do some sightseeing. You can deduct 100% of your airfare there and back, but you can deduct only three of the five hotel nights since two of them were for personal reasons.
Deducting bank fees
Having a separate checking account for your business makes it easier to separate business and personal expenses at tax time. While many banks charge monthly service fees for business accounts, those fees are tax-deductible. IRS Publication 535, which discusses common business expenses, doesn’t specifically address bank fees, but it does provide a rule of thumb for what is deductible.
The IRS states, “a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” Because business bank account fees are both ordinary and necessary expenses, you can write them off on your return.
Claiming interest expenses
Many businesses use credit cards and loans to finance their operations, pay bills and manage cash flow. The interest charged by credit card companies and other lenders is tax-deductible, if:
- You use the funds for business purposes.
- You are legally liable for the debt. In other words, you can’t deduct interest on a loan taken out by someone else.
- Both you and the lender intend for the debt to be repaid. If the lender doesn’t expect you to repay the debt, it’s a gift rather than a loan.
- You and the lender have a true debtor-creditor relationship. The IRS generally doesn’t allow business owners to deduct interest paid on loans from related parties (i.e., family and friends) because these loans may not charge an appropriate interest rate or even require full repayment.
There’s one more possible limitation on deducting business interest, but it applies only to businesses with annual gross receipts greater than $25 million (or related businesses with aggregated gross receipts greater than $25 million) in the previous three years. If the limit applies to your business, talk to your tax professional about calculating your deduction.
Parsing the pass-through deduction
If your business is a pass-through business (essentially anything but a C corporation), you may be able to deduct up to 20% of your business’s net income.
That can be a pretty hefty tax break for some, but it’s not available to everyone. To qualify for the full deduction, your individual taxable income from all sources must be below $157,500 if you’re single or $315,000 if you’re married and file jointly.
If your taxable income is above those thresholds, your deduction may be limited. Certain service businesses — including lawyers, accountants, doctors and financial advisors — may not be able to claim the full deduction if their income is too high. Figuring out who can and can’t take advantage of this tax break is challenging, as is calculating the deduction. To learn more, check out the IRS’s FAQ on the Qualified Business Income Deduction or talk to your tax professional.
Writing off furniture and equipment
When you purchase supplies for your business, you typically use them up within the year and deduct the full cost in the year you buy them. But assets with a longer life — such as machinery, vehicles, furniture, equipment and computer software — are meant to be used over several years. As such, you’re generally supposed to depreciate those assets, or write off their cost over their useful life.
However, Section 179 of the Tax Code allows business owners to deduct the full purchase price of certain assets in the year they are put to use. To qualify for Section 179, the property cannot be a building or land. The property must also be used at least 50% for business. In other words, if you buy a new car that is mainly driven for personal use, but 30% of your miles are for business, it won’t qualify.
However, if you purchase a lot of furniture, equipment and other eligible items, the deduction can be quite generous. Starting in 2018, you can deduct up to $1 million worth of purchases under Section 179. Keep in mind, though, if your total spending on Section 179-eligible property is more than $2,500,000 for the year, your deduction may be limited.
The bottom line
Taking advantage of these seven tax breaks should help you save some money when you file. If you missed one of them last year, you’re not out of luck. It might be worth talking to your tax professional about amending a prior return. When it comes to saving money on taxes, every dollar counts.