Deductible business expenses help entrepreneurs with many of the costs of running a company. Business owners know that most expenditures can be written off, although there may be limits and timing. Check out the most common tax deductions for small business.
Last Spring the IRS released data showing the common deductions taken on sole proprietorship returns. Other entities claim the same types of deductions — C corporations, S corporations, partnerships, and limited liability companies (LLCs), although you may find slightly different rules for some deductions.
See which ones apply to your 2019 tax return and think about which may impact your 2020 tax year for purposes of estimating taxes and business planning.
See a roundup of the most common tax deductions claimed on Schedule C of Form 1040 or 1040-SR by sole proprietors (including independent contractors and one-member limited liability companies not reporting elsewhere) as determined by the dollar amounts. The first three categories produce by far the largest write-offs.
Note: This list has been specially updated for the 2019/2020 tax season.
Top Small Business Tax Deductions
1. Car and truck expenses. Most small businesses use a vehicle, such as a car, light truck or van. Deduct the cost of operating the vehicle for business only if you require records to prove business usage. In deducting costs, you can eliminate the need to keep records of cost (e.g., gasoline, oil changes) if you rely on the IRS standard mileage rate of 58 cents per mile in 2019 instead of deducting your actual outlays. Use the standard mileage rate whether you own or lease the vehicle. But whether you deduct actual costs or use the standard mileage rate, you still need a record of the business mileage.
2. Salaries and wages. Payments to employees, including salaries, wages, bonuses, commissions, and taxable fringe benefits, are deductible business expenses for the business. (For employee benefit programs, such as retirement plan contributions, see item #19.) Of course, payments to sole proprietors, partners, and LLC members are not wages (i.e., they are not deductible business expenses) because these owners aren’t employees.
3. Contract labor. Many small businesses use freelancers or independent contractors to meet their labor needs. The cost of such contract labor is deductible. Be sure to issue Form 1099-MISC to any such contractor receiving $600 or more from you in the year (if payment is made to the contractor via credit card or PayPal, it’s up to the processor to issue them Form 1099-K, but you may want to send your own 1099-MISC for personal protection). Note that for services performed by your independent contractors in 2020 and later, Form 1099-NEC replaces the 1099-MISC.
4. Supplies. The cost of items used in a business (e.g., cleaning supplies for a cleaning service) as well as postage are fully deductible business expenses. Also, if you opt to use a de minimis safe harbor allowing you to deduct the cost of tangible property (e.g., tablets, vacuum cleaners) rather than depreciating, the items are treated as non-incidental materials and supplies. They are deductible business expenses when purchased or furnished to customers, whichever is later.
5. Depreciation. Deduction this as an allowance for the cost of buying property for your business. It includes the Section 179 deduction for equipment purchases up to a dollar limit ($1,020,000 in 2019; $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. The limit is 100% for property acquired and placed in service in 2019 (as well as in 2020).
6. Rent on business property. Fully deduct the cost of renting space — an office, boutique, storefront, factory, or other type of facility.
7. Utilities. Fully deduct electricity for your facility. Other utility costs include your mobile phone charges. You cannot claim a deduction for the cost of the first landline to your home if you claim a home office deduction and have a landline. Claim a second line, as a deductible utility cost as well.
8. Taxes. Deduct licenses, regulatory fees and taxes on real estate and personal property. And fully deduct your employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes. However, self-employed business owners cannot claim a business deduction for half of their self-employment tax; record it as an adjustment to gross income on your personal income tax return.
And owners of pass-through entities cannot treat their state and local income taxes on business income as a business write-off. These are personal taxes deductible only on Schedule A of Form 1040 or 1040-SR (and for 2018 through 2025, are subject to a $10,000 cap for all state and local taxes).
9. Insurance. The costs of your business owner’s policy, malpractice coverage, flood insurance, cyber liability coverage, and business continuation insurance are all fully deductible. However, there are two rules to note for health coverage. A small business may qualify to claim a tax credit for up to 50% of the premiums paid for employees (a better tax break than a deduction). Also the cost of health coverage for self-employed individuals and more-than-2% S corporation shareholders is not a business deduction. Instead, the premiums are deducted on the owner’s personal tax return.
10. Repairs. The cost of ordinary repairs and maintenance are fully deductible, while costs that add to the property’s value are usually capitalized and recovered through depreciation. However, there are various safe harbor rules that allow for an immediate deduction in any event.
11. Commissions and fees. They are fully deductible and may require you to report them on Form 1099-MISC for 2019 (Form 1099-NEC for payments in 2020) (see item #3). However, commissions paid in connection with buying realty are not deductible; they are added to the basis of the property and usually are recovered through depreciation.
12. Travel. If you or staff members travel out of town on business, you’ll find the cost of transportation (e.g., airfare) and lodging fully deductible. You must meet substantiation requirements to claim any travel deduction. IRS Publication 463 explains this in more detail. However, local commuting costs usually remain nondeductible.
13. Advertising. You may fully deduct ordinary advertising costs too.
14. Home office. Deduct a portion of personal expenses of a home as a business expense if you use the home regularly and exclusively as the principal place of business, a place to meet or deal with clients or customers, or as a separate structure used in the business. The deduction includes both direct costs (e.g., painting a home office) and indirect costs (e.g., the percentage of rent or mortgage interest and real estate taxes that reflect the percentage of business use of the residence).
15. Legal and professional fees. You can fully deduct accounting fees. The deductibility of legal fees depends on what you use them for. You may also fully deduct the cost for reviewing a contract or lease. However, you cannot deduct the cost for handling the closing on a property purchase; then add to the basis of the property.
16. Meals. Deduct these costs as a business expense only up to 50%. Although fully deductible meals do exist. Thus, you pay for half of a business lunch and Uncle Sam pays for the other. And you can only claim the deduction if you substantiate the expense (see IRS Publication 463).
17. Rent on machinery and equipment. Fees paid to lease or rent items used in your business are fully deductible.
18. Interest on business indebtedness. You can usually fully deduct interest on loans that the business takes as a business expense (e.g., interest on a line of credit used in a construction business). However, businesses with average annual gross receipts in the three prior years of more than $26 million in 2019 (or 2020) must limit the percentage of interest that’s deductible. And interest on loans by owners to buy their businesses are treated differently. Distinguish business interest from an owner’s investment interest or passive activity interest, which is not a business deduction.
For example, an individual who takes a personal loan to buy shares in an S corporation must allocate the debt proceeds to the business assets. Assuming you use the assets in the business, then your interest counts as deductible business interest. If some assets include investments, then you may consider a portion of the interest investment interest. You can count this as a personal deduction limited to the extent of net investment income. If some assets relate to a passive activity, such as rental realty, the allocable interest counts as passive activity interest subject to the passive activity loss limitation.
19. Employee benefit programs and qualified retirement plans. You may deduct the cost of employee benefit programs, such as education assistance and dependent care assistance, as well as contributions to employees’ qualified retirement plan accounts. For self-employed individuals, contributions to their own qualified retirement plan accounts are personal deductions claimed on Form 1040 or 1040-SR.
20. Mortgage interest. Deduct mortgage interest if your business owns realty. The law caps interest on a personal residence. But no cap exists on the size of loans on which interest can be claimed.
21. Office expenses. Flowers, fish tanks, magazine subscriptions to spruce up your office are deductible.
22. Carryovers. If you previously had a bad year, you may still have a net operating loss carryover that you can use to reduce your current income and cut your tax bill. Also check for home office deduction carryover that was previously barred because of a taxable income limitation.
23. Bad debts. Some businesses report on the accrual method of accounting and possess unpaid receivables or other debts. These businesses should take a deduction for anything that’s partially or wholly worthless.
24. Miscellaneous business deductions. Even if an expense doesn’t fit neatly into any of the categories listed above, you may still find it deductible as long as it’s “ordinary and necessary” for the business.
25. QBI deduction. While you take a personal write-off on an owner’s Form 1040 or 1040-SR, you base this on business income from a pass-through entity. The qualified business income (QBI) deduction lowers the effective tax rate paid on business profits on owners’ personal returns. The deduction makes up 20% of QBI. But you may find many limits to restrict or bar eligibility to claim any write-off.
Deductible Business Expenses
Determine which of these 25 tax deductions for small business to take on your 2019 business return. Also, project which items you need to take into account for 2020 estimated taxes. Discuss your situation with your CPA or other tax advisors to make sure you have done all that is required to qualify for a specific deduction.
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This article, "Top 25 Small Business Tax Deductions" was first published on Small Business Trends
January 21, 2020 at 07:51AM
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Barbara Weltman, Khareem Sudlow
