Small Business Tax Tips: A List of the Most Common Tax Deductions

Are you a small business owner getting ready to file your taxes?

Navigating tax forms for small businesses can prove tricky. Filing for yourself saves money, if you log all the deductions and credits you are eligible for, otherwise, it may cost you in the long run.

Read on to learn small business tax tips that will help you handle your taxes.

What Is a Tax Deduction?

A tax deduction lowers the amount of your income subject to taxes. This lowers your tax liability, meaning you owe the IRS less money for up to 20% of your income.

For instance, let’s say your business brought in $50,000, but you claimed $10,000 in deductions. Now, only $40,000 of your income gets taxed.

You can opt to take a standardized deduction, which does not require any proof or documentation. But, if you qualify for special deductions, itemizing will save you more money.

What Is a Tax Credit?

While deductions indirectly lower what you owe, a tax credit directly chops an amount off of the amount you owe the IRS. You get a dollar for dollar tax reduction with a credit.

So, let’s say you initially owed $5,000, but then receive a $1,000 tax credit. You will now only owe the government $4,000.

Non-refundable tax credits do not give you the full amount if you do not owe at least that amount. Refundable tax credits allow you value beyond your liability and can actually result in a refund if you qualify for them.

Small Business Tax Tips: Deductions and Credits

Now that you know the difference between a deduction and a credit, what do you qualify for? Continue reading to learn about common LLC write-offs and credits.

Start-Up Deductions

The IRS will allow you to deduct up to $5,000 for expenses incurred before business start-up if your costs fall under $50,000. For businesses whose beginning costs exceed this amount, the allowable deduction decreases as the amount increases. 

The items you can write off for this may differ depending on the type of business you own. Typically, it will cover equipment, business cards, supplies, etc.

Deductions for Bank and Credit Card Fees

As long as you set yourself up with a separate account for your business, you can deduct bank and credit card fees. This includes service charges, transfer fees, and overdraft fees incurred while conducting business.

You cannot, however, deduct these charges from your personal account, even if you used that for your business. The same holds true for credit cards in your name.

Meal and Entertainment Deductions

Businesses used to receive tax deductions for business-related entertainment, like taking a client to a baseball game. In 2018, changes to the tax rules ended this.

But, you can still get a 50% deduction for meals during which business is discussed and for food purchased on business trips. Also, they still offer a 100% deductible for holiday parties.

Rent and Home Office Deductions

You can use rent as a tax deduction. Whatever building or room you rent as your office space will qualify you for a property allowance claim and knock down your taxable income.

Do you work from home? No worries, because you will still get a deduction.

Creating a home office does not mean that you deduct your entire rent or mortgage payment. The home office deduction takes off $5 for each square foot, and up to a 300 square foot measurement.

Vehicle Expense Deductions

Keep track of your business-related vehicle expenses. You can write them off in one of two ways. 

You can use the IRS standard mileage rate of 58 cents per mile. Or, you might decide to keep a detailed record of gas, tolls, maintenance, and all other actual expenses.

Saving all your receipts might save you money if you drive an older car with low mpg and high repair costs. But, if you drive a lot for your business, then you may want to stick with the standard mileage rate.

New Business Tax Credit

The government likes to reward new business owners as they contribute to building the economy. As an incentive for taking the risk of entrepreneurship, new small businesses can apply for this tax credit during their first 3 years of operation.

To qualify, you must employ less than 100 people and pay them at least $5,000. This credit will chop off $500 or 50% from your tax liability in those few years.

Work Opportunity Tax Credit

This federal tax credit rewards employers who hire people from targeted groups who face adversity in the work world. This includes veterans, summer youth employees, ex-felons, and individuals who receive welfare and/or SNAP assistance.

The credit your business receives for this depends on which targeted group the employee falls into and the employee’s wages. The IRS limits this amount to the business income tax liability or social security tax owed.

Employer-Provided Child Care Credit

Does your business offer child care? Whether your business provides child care services on-premise or outsourced, you can qualify for this tax credit.

This credit equals 10% of the amount paid to provide these resources plus 25% of the expenditure amount, such as property maintenance. You can receive up to $150,000 each year for this credit.

COVID-19 Related Tax Credits

Amidst this global pandemic, small businesses have taken quite a hit in needing to provide paid leave for employees who cannot work during this time, while losing business at the same time. Fortunately, you can find some tax relief.

The government is providing a full refund for the amount you need to pay your employees through the Paid Sick Leave Refundable Credit and Paid Family Leave Refundable Credit. This will cover you for any COVID-19 sick leave or family leave you must pay your employees.

You may also qualify for the Section 2301 Employee Retention Credit if the attempts to stop the spread of this virus closed your business. So, this tax credit goes to “non-essential” business owners.

It offers up to $5,000 per employee to cover their ongoing expenses, like medical coverage. The CARES Act will also help by paying back 50% of the wages employers pay to employees.

Know What You Owe

Knowing exactly what you owe, and more importantly, what you don’t, will help you hold onto your hard-earned money. Use these small business tax tips to see what deductions and tax credits you qualify for!

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