BUSINESS OWNERS looking to lower their tax burden can take advantage of several money-saving deductions. These include popular deductions for vehicle expenses and home offices. It also includes relatively new qualified business income deduction that will allow some small business owners to write off 20% of their income. (DFW Business Advisors: Tax Deductions For Successful Businesses)
Here are five business tax deductions that you won’t want to miss:
- Qualified business income deduction.
- Section 179 deduction and bonus depreciation.
- Retirement plan contributions.
- Business vehicle deduction.
- Home office deduction.
Qualified Business Income Deduction
The Tax Cuts and Jobs Act of 2017 made significant changes to the tax code. For business owners, the most dramatic change was the creation of the qualified business income deduction.
Also known as the pass-through deduction or the 199A deduction, the qualified business income deduction allows certain business owners to deduct 20% of their income. The deduction is only available to owners of pass-through entities such as sole proprietorships, partnerships, S corporations and limited liability corporations. Plus, there are limitations on income and a person’s occupation.
To qualify for the full deduction, individuals must have taxable incomes below $160,700 or $321,400 for married couples filing jointly. Certain jobs such as attorneys and physicians can’t claim it.
Last year, we saw more people planning around it. In order to meet the income thresholds, some business owners may contribute more to deferred compensation retirement plans.
Section 179 Deduction and Bonus Depreciation
Business owners can now write off double the expenses of some purchases, thanks to the tax reform law. If you’re looking to purchase capital equipment, the big deduction is bonus depreciation and Section 179 deductions.
Expenses which can be immediately deducted are outlined in Section 179 of the tax code. These include vehicles, equipment, machinery and computers. Expenses not eligible for an immediate deduction are subject to depreciation. That means a business has to spread the value of the purchase over a period that could be decades. This then results in significantly smaller deduction amounts.
Under the tax reform law, the amount of equipment that can be immediately deducted jumped from $500,000 to $1 million in 2018.
With bonus depreciation, businesses can deduct 100% of the cost of qualified property in the year of purchase and put into use. Prior to tax reform, bonus depreciation was less 50% of a property’s cost and only new items qualified.
Retirement Plan Contributions
Setting up a retirement plan can result in significant tax savings. My first piece of advice to small business owners would be to maximize your contributions to your (retirement) plan. With a simplified employee pension individual retirement account or self-employed 401(k), business owners can contribute up to 25% of their income. This results in a maximum $56,000 deduction for tax year 2019.[
As a type of pension, a defined benefit plan is another good option for a company with very few or no employees. It allows a business owner to save significantly more for retirement than what would be in a 401(k) plan and that can result in more sizable tax savings too. Defined benefit plans are subject to complex government laws so business owners should consult with a professional when setting one up.
Business Vehicle Deduction
While the Tax Cuts and Jobs Act eliminated the possibility of claiming mileage for personal itemized deductions, business owners can write off the cost of using their vehicle for work. You don’t have to own a traditional business either.
We continue to see more and more folks working in the gig economy. Whether someone is driving for a ride-hailing company or traveling to perform work as an independent contractor, they can deduct vehicle costs as a business expense on the Schedule C tax form.
There are two ways to calculate the deduction. One is to add up the actual cost of maintenance, fuel and other expenses. The other is total the miles driven for business and take a standard mileage deduction for that amount. While the mileage method is easier, business owners might get a bigger deduction if they track their actual expenses. Either way, it’s important to keep detailed records.
Any business can deduct the cost of operating the vehicle from their taxable income, but only if they show records to prove business usage. Those planning to claim a mileage deduction for business travel should keep a log of their trips that includes the date, miles driven and purpose.
Home Office Deduction
Those who work out of their home can claim a home office deduction.
However, it can be a valuable deduction that shouldn’t be overlooked by those who can claim it. Eligible office spaces are those that are used exclusively for business purposes. They are a principal place of business or used regularly to meet with clients. Free-standing structures and garages can also qualify for a home office deduction if they are used exclusively for business purposes. Taxpayers who have a qualifying office can then deduct a portion of their home’s utilities, homeowner insurance, maintenance costs and similar expenses.
Being a business owner means juggling many responsibilities. Whether you are doing your own taxes or finding a professional to handle them, make sure you take advantage of these strategies.
Call Williams & Kunkel CPA today in Flower Mound at 972-446-1040 to have a chat and find out how you can save money on your taxes as a real estate professional.
(DFW Business Advisors: Tax Deductions For Successful Businesses)
Source: US News