If you run a small business, there are many financial advantages that come with it. In this post, we will talk about several ways that having a small business saves you money.
There are various deductions you can claim whether you are a solopreneur with no employees, a freelancer, or the owner of a large corporation. Business tax deductions were created to help entrepreneurs manage the costs of running a profitable company.
To be deductible, the IRS says an expense must be both ordinary and necessary for your business. Some common deductions for small businesses include:
- Employee salaries and benefits
- Labor paid to independent contractors or freelancers
- Professional fees (legal and accounting work)
- Rent for the space, equipment, use of property
- Interest on funds borrowed
- Taxes paid to federal, state, local, and foreign authorities
- Equipment including phones, printers, computers, etc.
- Office supplies
- Marketing costs
- And more
You cannot deduct personal or living expenses. However, if you have costs that are both personal and business such as vacation combined with a conference, you can deduct a portion use for business.
Home Office Expenses
If you use part of your home business, you might be allowed to deduct a variety of expenses by claiming the home office tax deduction. If you qualify, this is a valuable tax break that you should not miss.
If you are self-employed or own or leas a personal vehicle that you drive for your business, you can deduct expenses based on mileage.
You need to keep detailed records of your trips so you can allocate business versus personal miles driven. If your vehicle is used solely for business, you can deduct all its costs.
Having the right kinds of insurance can be critical for surviving unexpected financial hardships. The costs of various insurances are deductible when you are self-employed. These might include policies for business liability, interruption, errors and omissions, malpractice, property, cyber theft, and vehicles.
Travel and Meal Expenses
Speaking of travel, going out of town for business is a deductible expense. You can write off airfare, ground transportation, and lodging. Tax reform eliminated the deduction for business entertainment. However, you can still claim half the cost of meals if you purchase food or beverages during a recreational event. Just like with other types of deductions, it is critical to keep good records and receipts.
Retirement Plan Contributions
There are some retirement plans designed just for small business owners. Remember that with most retirement plans, taking withdrawals before age 59½ typically means you are subject to income tax plus an additional 10% early withdrawal penalty. So, it is important not to contribute money that you might need for everyday living expenses. There are a variety of retirement accounts you can use when you work for yourself.
Qualified Business Income Deduction
Another significant change for small businesses created from the Tax Cuts and Jobs Act is qualified business income (QBI) deduction. It allows owners of pass-through businesses—that is, businesses not subject to corporate income tax, including sole proprietorships, partnerships, and S corporations—to deduct 20% of their income.
To qualify for 2019, you must have taxable income below $157,500 as an individual, or $315,000 if you file taxes jointly. For all income within these limits, 20% is not taxed. However, some professionals, such as doctors and attorneys, are subject to higher income thresholds they must meet before the QBI deduction kicks in.
Tax reform changed the way tax is calculated for most taxpayers. So, even if you are not self-employed, be sure to review your federal and state tax withholding. That will help you avoid a surprise tax bill and a potential penalty.