Owning a business comes with many benefits. There is no income ceiling, entrepreneurs are empowered to set their own priorities and being laid off is never a worry. In addition to these benefits, businessowners also qualify for numerous tax deductions that can save them a large chunk year after year.
For the 2019 tax year, there are five tax deductions that make a huge difference at tax time.
If you drive your personal car for business or your business owns a vehicle, then you have access to one of the most helpful tax deductions, the auto expense deduction. There are two methods for claiming this deduction: The actual expense method and the standard mileage rate method.
The standard mileage method is far simpler. You just need to track the number of miles driven for business purposes, plus and business-related tolls or parking costs. Your deduction is the standard mileage rate furnished by the IRS times the miles driven, plus tolls and parking expenses.
To take the actual expense as a deduction, you must track all the business-related expenses and calculate the depreciation on the vehicle. It’s more work than the standard method, but in some cases the increased deduction is worth it.
Note: If you drive a newer car, it is more likely that the actual expense method will yield the higher deduction.
Business Startup Costs
Business startup costs consist of the expenses you paid to launch your enterprise up to the day you officially open. Known as capital expenses, these costs must be deducted over multiple years at a maximum of $5,000 per year for up to 15 years. For example, if you spent $50,000 in startup costs up until the day you open, you can deduct all those costs over a 10-year period. Costs incurred after the business opens, such as advertising, utilities, office supplies, etc. can be fully deducted in the tax year they occur.
Though spacing the deduction out over many years may seem like a disadvantage, there is a silver lining. Most businesses lose money in the first few years of operation. Deferring the capital expenses deduction allows you to use it to offset profits made in later years.
Business insurance policies protect your livelihood. Without adequate protection, a loss from a fire, theft or lawsuit could put you out of business. Insurance is important, but it is also expensive. Thankfully, those costly premiums also result in juicy tax deductions. Insurance policies with deductible premiums include the following:
• Employee medical insurance
• Fire and theft insurance
• Credit insurance
• Liability insurance
• Malpractice insurance
• Workers’ compensation insurance
• Business interruption insurance
• Life insurance for corporate officers and directors
• Unemployment insurance contributions
The Tax Cut and Jobs Act (TCJA) helps businessowners by allowing them to deduct up to 100% of the cost of equipment placed in service between September 27th, 2017 and December 31st, 2022. The first-year deduction is then phased out over the next five years, so businessowners will then be required to space the cost of equipment over multiple years according to depreciation. The phase out reduces the first year “bonus” deduction by 20% a year according to the following schedule:
2023 80% of cost deductible in the first year
2024 60% of cost deductible in the first year
2025 40% of cost deductible in the first year
2026 20% of cost deductible in the first year
2027 0% of cost deductible in the first year
The Qualified Business Income (QBI) Deduction
The TCJA also helps businessowners reduce their personal income taxes. The QBI deduction allows owners of certain types of businesses to deduct up to 20% of qualified business income from their personal tax liability. The QBI is an above the line deduction, which means it reduces adjusted gross income, resulting in significant savings that remain in full effect regardless of whether the taxpayer takes the standard deduction or itemizes.
Most small business owners can qualify for the QBI, though there are income limits and certain professionals are ineligible for the tax break.
Businessowners can save themselves considerably at tax time by maximizing available deductions. By deducting business auto expenses, capital expenses, insurance costs and the price of equipment placed in service, businessowners can reduce taxable business income by thousands. Then they can use the QBI to deduct 20% of their business income off of their personal taxes. With these deductions available, tax season can be a great time of year.
Tax Avenger Canton MI is one of the best tax firms in the area providing tax services for individuals and small businesses. Our business tax preparation begins with the creation of a comprehensive plan based on an understanding of the client business’ type and operation. We work with clients to help them maintain tax compliance with federal, state, and local regulations. And ensure the client is receiving any and all deduction or credit available to them within the law.
Our mission is to maximize the benefits the client is entitled to and minimize their tax liabilities through a detailed analysis of their tax situation and needs. Call today for a Free Consultation!