2020 Small Business Tax Deductions You Need to Know About
Many entrepreneurs start a small business to pursue their passions. But among business owners surveyed, almost half (46%) don’t have formal business training. A slightly lower percentage only feels somewhat confident in their abilities as business owners, according to a 2019 small business report. Unfortunately, 29% of businesses fail because they run into problems with cash flow. And paying more in taxes than necessary only adds to the financial burden.
There are a few essential tax deductions and credits small business owners can claim to keep more of their hard-earned money. If you’re a small business owner or self-employed worker, check with your accountant to see if the following tax breaks apply to you.
Start with the basics
As a business owner, you can deduct the cost of running your business. This includes employee salaries, office space rent, loan interest, and more. That is, as long as those expenses are “ordinary and necessary,” according to the IRS. In other words, the expenses must be common expenses among other businesses in your industry and necessary to operate your company.
However, keep in mind that the personal portion of these expenses is not deductible. For example, while your company vehicle is a deductible expense, the personal use of that vehicle is not.
As always, there can be some grey area between personal and business expenses, especially for self-employed workers. Reduce the grey area by keeping your business and personal expenses completely separate. And always consult an accountant when you’re unsure.
Common business deductions
There are a few common business deductions that apply to almost every small business owner. These deductions include things like office space, meals, and transportation.
Home office deduction
If you use part of your home regularly and exclusively to run your business, you can claim a home office deduction. The deduction is based on the square footage of your home used for your business. And it can include utilities, rent, mortgage interest, depreciation, and even cleaning fees.
The math there can get a little tricky, but the IRS provides a general calculation to help you figure out the deduction amount. Multiply the area of your home used for business by $5, up to a maximum deduction of $1,500.
You can write off the full cost of new and used purchases like computers, furniture, and equipment rather than depreciating the cost of the asset over time. The depreciation write-off allows business owners to increase deductions and reduce taxable income.
Business travel and transportation deductions
The line between business and personal transportation can seem blurred to first-time entrepreneurs. For example, you can deduct business-related trips throughout the day (like going to the store to get supplies or meeting clients off-site). But you cannot deduct the commute between your home and office.
There are two methods of travel deductions: actual expense or standard mileage. The actual expense method requires you to track and deduct each business-related travel expense by itself. This includes gas, insurance, maintenance, and more. It can be tedious but worthwhile for business owners who travel a lot and incur high vehicle maintenance costs.
The standard mileage method, on the other hand, only requires you to track and report mileage. The standard mileage rate for 2019 is 58 cents per mile and reflects standard vehicle expenses. As always, work with your accountant to determine the most beneficial method for your business.
Finally, if your work requires you to travel out of town, you can deduct the cost of traveling to and from your destination. You can also claim any business-related expenses while you’re there, such as meals and lodging. According to the IRS, these travel expenses must be “reasonable” and not extravagant.
Meal deductions apply to meals purchased while traveling for business or meals provided to a current or potential business customer. Business meals must include business meetings before, during, or directly after the meal is consumed. In either case, you can deduct up to 50% of the meal expense, as long as the meal is not considered lavish or extravagant.
Holiday gifts for clients or partners qualify as deductible business expenses, but there are a few limitations. First and foremost, you can only deduct $25 annually for business gifts given to any one person. Second, promotional items like pens or calendars (read: swag) do not count towards the gift deduction. In general, a promotional item costs $4 or less, has your name or logo on it, and is one of many identical items that you distribute widely.
Employee benefit deductions
If you offer employee benefits like retirement plans, pay for health insurance, or have workers in a targeted group, you’re eligible for additional tax deductions.
Retirement plan deductions
Retirement plans give employees and employers alike a tax-favored way to save for retirement. Employers can deduct their contributions to employee retirement, as well as contributions to their own retirement savings.
Additionally, small business owners are allowed a tax credit equal to 50% of the first $1,000 incurred in starting a retirement plan. This includes a 401(k) or IRA. Consult your financial planner to determine which plan is the best fit for your business and your employees.
Health insurance deductions
If you’re a self-employed worker, you can deduct the costs of your personal health insurance premiums. That is, as long as your business claims a profit, and you were not eligible to enroll in a spouse’s health plan. If your business claims a loss for the tax year or you were eligible to enroll in a health plan but chose not to, you cannot claim this deduction.
Family and medical leave credit
If you have an employee who takes paid family or medical leave, you can claim a credit for wages paid to them during that time. The Tax Cuts and Jobs Act credit starts at 12.5% for employees receiving payments of 50% their normal salary. It goes up to 25% if the leave payment rate is 100% of the normal rate.
Work opportunity credit
If you employ veterans, ex-felons, food stamp recipients, or other targeted group employees, you can claim a tax credit on their first and second year’s wages. The credit is based on a percentage of their wages and can range from $2,400 to $9,600 per employee, depending on the type of employee. To qualify for this credit, you must request and obtain a certification for each employee from the state employment security agency to prove that the employee is a member of a targeted group.
Additional small business deductions
Finally, there are a few tax deductions you might be entitled to for starting and running a small business.
20% business income deduction
If you report your operations on a 1040, you’re eligible for a 20% deduction on business income. This deduction helps curb high tax rates for small business owners and allows you to keep more of your hard-earned cash tax-free!
Self-employment tax deduction
Self-employed workers are responsible for paying full contributions to Social Security and Medicare. Commonly, employees and employers split these costs. For that reason, self-employed workers can deduct a portion—up to half—of the self-employment tax.
Start-up costs deduction
If you started your business within the last tax year, you’re eligible for a $5,000 write-off for start-up expenses. These expenses include the amounts paid to create a trade or business or to investigate the creation or acquisition of a trade or business. Once your business begins operations, your business expenses become deductible (back to basics!).
Nothing is certain but death and taxes. Don’t let taxes be the death of your business. By taking advantage of these small business tax breaks and deductions, you can reduce your tax liability and increase your cash flow. And always consult a tax professional to ensure you’re claiming the right tax breaks and filing correctly.
Myranda Mondry is a copywriter and researcher for TSheets by QuickBooks, an employee time tracking and scheduling software that’s used by businesses worldwide. Based in the up-and-coming tech community of Boise, Idaho, she has a journalism degree from Boise State University and a serious passion for helping small businesses succeed. In her spare time, she can usually be found curled up with a good book or hiking Boise’s famous foothills.