15 Tax Breaks for Small Business Owners

With tax season right around the corner it’s time for small business owners to start preparing. It’s time to pull together the information you need to maximize all of the tax breaks that are available to small business owners. Here are 15 tax breaks that you can take advantage of in 2020. These rules apply to both self-employed individuals as well as small business owners.

1.)   General rules on deductibility. Based on the Internal Revenue Code, to be deductible an expense is to be ordinary and necessary. Ordinary means the expense is common in an industry. Necessary means it’s helpful and appropriate for your trade or business. 

a.     For example, salaries to employees, rent paid for office space or interest paid on a company loan are all deductible. 

However, personal use of an expense is not deductible. For example, personal use of a company car.

2.)   20% Qualified Business Income (QBI) deduction. Under the Tax Cuts and Jobs Act (TCJA) small business owners that file a 1040 including those who file a Schedule C get a 20% QBI deduction. Small businesses qualifying for the 20% could effectively lower their effective marginal tax rate to 29.6%. This deduction does phase out for high income earners (over $160,700 for single filers and $321,400 for joint filers).

3.)   Home Office Deductions. If you perform your duties regularly and exclusively in a part of your home you can take a home office deduction. The amount of the deduction is based on the size of the space. The deduction covers a percentage of Utilities, Rent, Mortgage Interest, Depreciation, and Cleaning fees. This deduction can cause a red flag with the IRS so the IRS created a simplified calculation you can use. This calculation is $5 per square foot of space with a maximum deduction of $1,500. If you choose not to use the simplified calculation then paperwork backing up all of your expenses would need to be kept. Another caveat to using the expense process is that when you sell your home there is a capital gains consequence for the amount you depreciated. This deduction is best reviewed with a tax professional so that you make the right decision not just for this year but for years to come as well.

4.)   Start Up Costs. $5,000 of start up expenses can be written off for amounts paid to create a business, investigate the creation or acquisition of a business. This includes expenses such as ads, travel or other necessary cost to secure distributors, suppliers, or customers. Once a business starts these expenses become ordinary business expenses. This deduction is reduced if total startup expenses exceed $50,000.

5.)   Retirement Plans. Contributions made to plans by an owner for themselves and employees can be deducted. You can set up a 401k or SIMPLE plan. If you want to avoid some of the complex rules and expense you can set up an IRA, SEP IRA or SIMPLE IRA. Small businesses are allowed a tax credit of 50% of the first $1000 spent to set up these accounts.

6.)   Depreciation. Under Section 179 you can deduct up to $1,020,000 in your first year. However, there are limitations on vehicles.

7.)   Transportation expenses. You can not deduct the cost for commuting between home and business but you can deduct mileage to attend meetings, pick up supplies, meet a client, etc. You can deduct either actual expense or the Standard Mileage Rate which is 57.5 cents for 2020. The standard rate is considered to cover gas, lease payment, insurance, maintenance, repairs, registration, and depreciation. If you record actual expense then each expense is recorded separately.

8.)   Health Insurance Deduction. Self-employed individuals can take a deduction for personal health insurance premiums if the following criteria is met. The business is claiming a profit. You are not eligible for an employer health plan or a spouse’s health plan. If you satisfy both of these elements the premiums are deductible.

9.)   Meal Expenses. Meal expenses are deductible if they are part of business travel or if they are provided to a current or potential customer. 50% of the meal expense is deductible.

10.) Business Travel. When traveling out of town any expenses incurred getting to, from or at the destination are deductible as long as they are not considered lavish or extravagant. This includes air travel, car rental, hotel and meals.

11.) Self-Employment Tax Deductions.  As an employee FICA taxes are split between the employer and the employee. For self-employed individuals they are responsible for the whole thing. But self-employed individuals can claim a deduction which is roughly 50%.

12.) Gifts for Business Associates. Holiday gifts qualify as a deduction as long as its limited to $25 per year per person. Promotional items don’t count towards the $25 limit as long as they are $4 or less and have the business name permanently imprinted. These are items such as calendars or pens.

13.) Credit for Paid Family and Medical Leave. The TCJA implemented a credit for employer paid family or medical leave up to 12 weeks. The credit starts at 12.5% for payments of 50% of their salary up to 25% if 100% of salary is paid.

14.) Credit for Research and Development Expenses. To qualify for this credit, you must incur expenses for the purpose of discovering information that is technological in nature and for the development of a new or improved business component. 

a.     For example, a bakery that invests in developing machinery that automates the icing process.

15.) Work Opportunity Credit. This credit is available to businesses that pay first and second year wages to certain targeted employees including veterans, long term family assistance recipients, and summer youth. This credit is a percentage of the wages paid to the qualifying employee. The employer must first request and be issued a certificate from the state employment security agency to prove that the employee is from one of the targeted groups.

This is a lot of information to take in so it’s best to seek help to make sure you get all of the tax benefits you are allowed. If you have any questions or would like further information on any of these tax breaks feel free to contact me at [email protected].

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