It’s simple: The more tax deductions your business can legitimately take, the lower its taxable profit will be. In addition to putting more money into your pocket at the end of the year, the tax code provisions that govern deductions can also yield a personal benefit: a nice car to drive at a smaller cost, or a combination business trip and vacation. It all depends on paying careful attention to IRS rules on just what is—and isn’t—deductible.
When you’re totaling up your business’s expenses at the end of the year, don’t overlook these important business tax deductions.
1. Auto Expenses
If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
There are two methods of claiming expenses:
- Actual expense method. You keep track of and deduct all of your actual business-related expenses and deduct an amount for depreciation each year.
- Standard mileage rate method. You deduct a certain amount (the standard mileage rate) for each mile driven, plus all business-related tolls and parking fees. Check the IRS website for the current standard mileage rate.
As a rule, if you use a newer car primarily for business, the actual expense method provides a larger deduction at tax time. If you use the actual expense method, you can also deduct depreciation on the vehicle. To qualify for the standard mileage rate, you must use it the first year you use a car for your business activity. Moreover, you can’t use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken bonus depreciation or a Section 179 deduction for the vehicle. (For more on bonus depreciation and Section 179, see “New Equipment,” below.)
If your auto is used for both business and pleasure, only the business portion produces a tax deduction. That means you must keep track of how often you use the vehicle for business and add it all up at the end of the year. Certainly, if you own just one car or truck, no IRS auditor will let you get away with claiming that 100% of its use is related to your business.
2. Expenses of Going Into Business
Once you’re running a business, expenses such as advertising, utilities, office supplies, and repairs can be deducted as current business expenses—but not before you open your doors for business. The costs of getting a business started are capital expenses, and you may deduct $5,000 the first year you’re in business; any remainder must be deducted in equal amounts over the next 15 years (180 months).
If you expect your business to make a profit immediately, you may be able to work around this rule by delaying paying some bills until after you’re in business, or by doing a small amount of business just to officially start. However, if, like many businesses, you will suffer losses during the first few years of operation, you might be better off taking the deduction over five years, so you’ll have some profits to offset.
3. Books and Legal and Professional Fees
Business books, including those that help you do without legal and tax professionals, are fully deductible as a cost of doing business.
Fees that you pay to lawyers, tax professionals, or consultants generally can be deducted in the year incurred. However, if the work clearly relates to future years, they must be deducted over the life of the benefit you get from the lawyer or other professional.
You can deduct the premiums you pay for any insurance you buy for your business as a business operating expense. This includes:
- medical insurance for your employees
- fire, theft, and flood insurance for business property
- credit insurance that covers losses from business debt
- liability insurance
- professional malpractice insurance—for example, medical or legal malpractice insurance
- workers’ compensation insurance you are required by state law to provide it to your employees
- business interruption insurance
- life insurance covering a corporation’s officers and directors if you are not a direct beneficiary under the policy, and
- unemployment insurance contributions (either as insurance costs or business taxes, depending on how they are characterized by your state’s laws).
When you travel for business, you can deduct many expenses, including the cost of plane fare, costs of operating your car, taxis, lodging, meals, shipping business materials, cleaning clothes, telephone calls, faxes, and tips.
What about combining business and pleasure? It’s okay, as long as business is the primary purpose of the trip. However, if you take your family along, you can deduct only your own expenses.
If you use credit to finance business purchases, the interest and carrying charges are fully tax deductible. The same is true if you take out a personal loan and use the proceeds for your business. However, if your business profit is more than $25 million, you’ll only be able to deduct 30% of your interest expenses. Be sure to keep good records demonstrating that the money was used for your business.
Due to changes created by the Tax Cuts and Jobs Act (TCJA), most small businesses are able to deduct 100% of the cost of equipment in a single year. This may be done by using 100% bonus depreciation, expanded Section 179 expensing, and the $2,500 de minimis deduction. These deductions may be used for tangible personal property and computer software, but not real property, which must be depreciated over many years.
For used or new personal business property placed in service September 27, 2017 through December 31, 2022, 100% of the cost may be deducted in a single year through bonus depreciation. In later years, first-year bonus depreciation deduction amount goes down, as follows:
- 80% for property placed in service during 2023
- 60% for property placed in service during 2024
- 40% for property placed in service during 2025
- 20% for property placed in service during 2026
- 0% for property placed in service 2027 or later.
In addition, under Section 179 of the Internal Revenue Code, you can currently deduct up to an annual threshold amount of the cost of equipment and certain business assets you purchase and place in service that year and use over 50% of the time for your business (not personal use). The Section 179 annual limit was set permanently at $1 million effective January 1, 2018.
In addition to the annual limit, there is a phase-out on how much property can be deducted under Section 179 that starts when a business purchases more than $2.5 million in business property in a year. Once this annual investment limit is reached, the amount you can deduct under Section 179 is reduced dollar for dollar by the amount your purchases exceed the $2.5 million limit. For more information, see Section 179: What Every Business Owner Needs to Know About This Depreciation Deduction.
Finally, using a provision of the tax law called the de minimis safe harbor, a business may deduct in a single year any tangible personal property that costs $2,500 or less, as stated on the invoice. You must file an election with your tax return to use this deduction.
8. Charitable Contributions
If your business is a partnership, a limited liability company, or an S corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. If you own a regular (C) corporation, the corporation can deduct the charitable contributions.
If you’ve got some old computers or office furniture, giving it to a school or nonprofit organization can yield goodwill plus a tax benefit. However, if the equipment has been fully depreciated (written off), you can’t claim a deduction.
Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax:
- Sales tax on items you buy for your business’s day-to-day operations is deductible as part of the cost of the items; it’s not deducted separately. However, tax on a big business asset, such as a car, must be added to the car’s cost basis.
- Excise and fuel taxes are separately deductible expenses.
- If your business pays employment taxes, the employer’s share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so isn’t a business expense.
- Federal income tax paid on business income is never deductible. State income tax can be deducted on your federal return as an itemized deduction, not as a business expense. However, the annual personal itemized deduction for state and local taxes is limited to $10,000.
- Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance. If the assessment is for an improvement—for example, to build a sidewalk—it isn’t immediately deductible; instead, it is deducted over a period of years.
10. Education Expenses
You can deduct education expenses if they are related to your current business, trade, or occupation. The expense must be to maintain or improve skills required in your present business. (The cost of education that qualifies you for a new business or trade isn’t deductible.)
11. Advertising and Promotion
The cost of ordinary advertising of your goods or services—websites, business cards, yellow page ads, and so on—is deductible as a current expense. Promotional costs that create business goodwill—for example, sponsoring a peewee football team—are also deductible as long as there is a clear connection between the sponsorship and your business. For example, naming the team the “Southwest Auto Parts Blues” or listing the business name in the program is evidence of the promotion effort.
12. Pass-Through Tax Deduction
The Tax Cuts and Jobs Act created a new tax deduction for individuals who earn income through pass-through business. This includes any business that is a:
- sole proprietorship (a one-owner business in which the owner personally owns all the business assets)
- S corporation
- limited liability company (LLC), or
- limited liability partnership (LLP).
Such individuals may deduct an amount up to 20% of their net income from each pass-through business they own. This is in addition to all their other business deductions. The pass-through deduction is a personal deduction pass-through owners can take on their returns whether or not they itemize.
However, this deduction is limited for people whose business is providing personal services. This includes people providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading and dealing in securities or commodities, or any business where the principal asset is the reputation or skill of one or more of its owners (but there is an exception for architects and engineers). A business owner who provides such services is entitled to the 20% pass-through deduction only if his or her taxable income from all sources after deductions is less than $315,000 if married filing jointly, or $157,500 if single. The deduction is phased out if income exceeds the $315,000/$157,500 limits. It disappears entirely for marrieds filing jointly whose income exceeds $415,000 and for singles whose income exceeds $207,500.
If you’re not involved in providing services, you can still qualify for a pass-through deduction if your business income exceeds $415,00/$207,500, but it is subject to a special limit: Your deduction can’t exceed (1) 50% of your applicable share of the W-2 employee wages paid by the business, or (2) 25% of the your share of W-2 wages, PLUS 2.5% of the original purchase price of the long-term property used in the production of income—for example, the real property or equipment used in the business.
This deduction is scheduled to end on January 1, 2026.
Easily Overlooked Business Expenses
Here are some additional routine deductions that many business owners miss. Keep your eye out for them.
- bank service charges
- business association dues
- business gifts
- business-related magazines and books
- casual labor and tips
- casualty and theft losses
- coffee and beverage service
- consultant fees
- credit bureau fees
- office supplies
- parking and meters
- petty cash funds
- seminars and trade shows
- taxi, bus, and Uber-type fares.
Note: Just because you didn’t get a receipt doesn’t mean you can’t deduct the expense, so keep track of those small items.
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On – 27 Sep, 2017 By Stephen Fishman