For most small businesses in the United States, tax returns are due March 15. While you may be rushing to get your papers in order, however, first make sure you don’t forget about key business deductions that can ultimately save your business money during tax season.
Understandably, companies typically focus on the revenue side. While most of the time, businesses want to increase reported profits, when it comes to paying taxes, focusing on the expense side can help you reduce the business tax liabilities associated with that profit.
That is where deductions come in. They subtract from the revenue side to reduce the amount of taxable income for the business. To help you take advantage of the available deductions, we’re providing you a list and description of the top eight often missed (or misunderstood) business deductions.
Before we address the commonly-missed deductions, let’s briefly outline the most obvious ones:
- Salaries and wages. Deduct all of it; salaries, bonuses, commissions, and employee benefits.
- Rent. Deduct it all. This includes your office, warehouse, retail space or other types of facilities. We will discuss home offices below.
- Supplies and office expenses. This includes office supplies, postage, cleaning supplies, basic tools used in your business, water or coffee subscriptions, etc. If they are more expensive items, it may go into your depreciation bucket discussed below.
Instead of focusing on these obvious deductions, here are eight that are often overlooked or misunderstood.
1. Automobile expenses
If there are company-owned or leased automobiles, the deduction of those expenses is easy to calculate and designate. Many tax professionals advise small business owners to be careful about leasing or having company cars that are really for personal use because it may be a red flag for the IRS.
However, even if you use your personal vehicle, you may be able to take advantage of a deduction. To be entitled to a deduction, and to survive an audit, you should have records to prove your business usage. You can also rely upon an IRS rule if you don’t have documentation and deduct $0.58 per mile in 2019. Even with this method, you need to be able to establish what percentage of the mileage is business versus personal.
2. Home office
The home office is another area where small business owners need to tread lightly. The IRS knows that business owners are often overly aggressive in trying to deduct personal home expenses as a business expense. An aggressive approach may raise the attention of the IRS.
If you use your home regularly for your business, you can deduct expenses. This is easily justified if your home address is your primary business address, you meet with other employees or contractors there, or you meet with customers in your home. You can deduct both direct costs related to improvements made to your home or indirect costs such as a percentage of your overall mortgage and taxes.
3. Start-up costs
You likely know that professional fees paid to lawyers and accountants are usually deductible, but there may be some other expenses often described as start-up costs that you can also deduct. Generally, there are three types of start-up costs eligible for deductions assuming you actually opened the business last year. For more specifics, check out Chapters 7 and 8 of IRS Publication 535. The three types of costs include:
- Business research. This might include market surveys, competitive analysis, costs related to your research if you visit other locations and the payment of any consultants.
- Opening preparations. Before you had your grand opening, you likely incurred expenses related to employee training, visiting suppliers, advertising expenses and consultants.
- Organizational costs. You can deduct the costs related to setting up your business with your local state whether you use a service like Swyft Filings or a lawyer. You can likely include state filing fees, professional fees, registered agent expenses and all the other little expenses you incurred for filings, permits or expenses you needed to get done before you opened your door.
Taking a deduction for depreciation can be a little tricky, but despite some of the complexities, it can be valuable. Depreciation deductions allow you to deduct the costs of buying property for your business over time. It includes the Section 179 deduction for equipment purchases up to $1,020,000 in 2019 and $1,040,000 in 2020. Certain other limits also apply. The depreciation category also includes a bonus depreciation allowance, which is another type of write-off in the year costs are paid or incurred. If you purchased a major piece of equipment or real property last year, you may want to consult with a tax professional to make sure you are maximizing your available depreciation deductions correctly.
5. Bad debts or receivables
Most entrepreneurs are eternal optimists, or they would not have started this wonderful journey. But, sometimes, you need to accept that the customer that owes you money is never going to pay. Depending on your accounting method, you may have paid tax on that “revenue” that never came in. If you write off the bad debt or accounts receivable, you might be able to at least salvage some of the pain by receiving a deduction for the write off of bad debt.
6. QBI deduction
QBI stands for Qualified Business Income, which is part of the recent changes to the tax law. If you operate a pass-through entity like an S Corp or an LLC, then you may qualify for a deduction that allows you to deduct up to 20% of your total income. There are many restrictions and limits to eligibility, so you may want to visit with a tax professional.
7. Interest on business loans
If you took out financing and are paying interest back to a bank or other financing company, you can usually deduct 100% of the interest expense. This includes interest on lines of credit or credit cards. There are limits on the available deductions for high earners. The deduction must be for business interest and not personal loans taken out by any owners to buy their interests in the companies.
If the year before last was a bad one and you had a net loss, some of that loss may be used to offset the taxes due now. This is referred to as a net operating loss carryover. This can get complicated and you may want to visit with a tax professional, but you should take advantage of losses from prior years if they are available to you.
Written by: Travis Crabtree
Travis Crabtree is the President and General Counsel of online business filing company Swyft Filings and Counsel with the law firm of Gray Reed & McGraw, LLP in Houston, Texas.