WHEN YOU FIRST START A BUSINESS, YOU DON’T KNOW WHAT YOU DON’T KNOW.
This can be especially true when tax time rolls around. Many business owners aren’t aware of the abundant number of small business tax deductions out there that can take the sting out of tax season. Like most tax laws, the rules around deductions change all the time. The most recent business tax deduction act, the Tax Cuts and Jobs Act, took effect in 2018 and started impacting tax returns filed in 2019. Use this as a guide as you prepare your 2020 return and always consult the IRS guidelines on small business tax deductions for the latest information.
HERE IS A LIST OF 10 DEDUCTIONS THAT SMALL BUSINESSES TEND TO OVERLOOK.
Many entrepreneurs don’t realize they can claim business expenses on a tax return for expenses that hit prior to the business’ launch. Most small businesses can deduct up to $5,000 on their first year’s return.
Taxes, Interest, Fees & Charitable Contributions
If your business pays tax to any state or local jurisdiction, you may be able to deduct those taxes as a business expense on your federal return. If you pay for business expenses with credit cards, you can deduct any interest and late fees you incur. You can also deduct banking fees such as card-processing fees, fees when making payments, and any others you incur on your business banking accounts. Just like with startup costs, any money you borrow to start the business can be recorded as business liability and the interest can be expensed accordingly. Charitable contributions may be deductible as well.
Wages and Payroll Taxes
Being an employee in your own business has a lot of benefits at tax time for your personal tax return. By paying yourself a wage or salary rather than a distribution or dividend, you’ll avoid paying a self-employment tax on your personal return. You should also claim all other employee wages and payroll taxes as deductions for the business.
Retirement Plan Contributions
Retirement planning and tax planning go together. The tax benefits you’ll receive depend on the retirement plan you have — IRA, 401(k), or one of many others. Businesses can establish inexpensive 401(k) plans with higher contributions for owners. Other retirement account options are available for small businesses.
Most small business owners will have to deal with bad debt at some point. Bad debt accrues when your business is owed for amounts that have not been paid. This could include loans to clients or suppliers, goods sold but not paid or the sale of a mortgaged property, just to name a few. The IRS allows businesses to claim bad debt as a deduction if the amount owed is included in your gross income or lent out as cash. You’ll need to prove that the debt is worthless.
If you run your business out of your home, there’s a long list of home-related expenses that you can consider deducting. These can include, but are not limited to, homeowner’s insurance; utilities; property taxes; and home repairs and maintenance.
To deduct home office expenses, you need to have a physical office in your home. Working on your laptop from the kitchen table does not count as an office in the eyes of the IRS. Your home office should be a dedicated space for running your business and it needs to be your principal place of operation.
Depending on the type of business entity you own, you may be eligible to take advantage of a self-employed health insurance deduction on your personal return. This is often a significant deduction as it includes the insurance you paid not just to your plan but also to your entire family’s insurance costs. Of all the frequently missed deductions on this list, this one tends to stand out as the most often overlooked.
Education and Training
Investing in employee education is an important part of many business growth plans and these expenses are fully deductible. You can also deduct entry fees or other similar costs like attending workshops, conferences, tradeshows, and other expenses that allow employees to expand on their knowledge of a subject directly related to the business.
Marketing, advertising and other promotional costs that bring in new customers and retain current ones are deductible expenses. Some of the expenses that qualify include advertising; public relations; website development; and email marketing.
Travel and Entertainment
Some business travel and entertaining expenses are deductible and others are not. To get started, look at the article, “What Every Entrepreneur Should Know About Travel & Entertaining Deductions” at score.org.
The money a business can save by maximizing potential tax deductions to reduce their tax liability can end up saving significant dollars that can be invested back into the business.
SCORE SC Lowcountry is a nonprofit association dedicated to helping small businesses get off the ground, grow, and achieve their goals.