It’s the happiest time of the year, tax season. Well, not really, but there are ways of making your taxes less painful and saving a small fortune.
But with the new changes to the tax laws, knowing when to take a deduction can be confusing.
To help you out, we’ve created a complete list of all the tax deductions and credits you can take, whether you own an LLC, partnership, sole proprietorship, or an S corporation.
We’ve been as through possible and cited the Internal Revenue Code for each deduction. Remember to consult a CPA or tax professional before taking any deductions.
How the New Tax Law Impacts Your Tax Deductions
In December 2017, Congress signed the Tax Cuts and Jobs Act, which became effective in January 2018.
Currently, the act has simplified the form 1040, expanded the amount of the standard deduction, and capped the amount of both state and local tax deductions to around $10,000.
The biggest change is the reduction in the corporate tax rate, which decreased from 35% to 21%. Though the tax rate is the lowest it has been in decades, companies may also have corporate income tax levied by their state.
If your business is smaller, you’re in luck. Many companies like sole proprietorships, partnerships, and S corps are eligible for a 20% qualified business income deduction.
These companies are pass-through entities, meaning that the income passes through to the business owner and goes on their Form 1040.
There are some other changes from the Tax Cuts and Jobs act that might impact your small business deductions.
The act has removed the deductions for moving expenses, except for members of the military. It has also eliminated the net operating loss carrybacks, except for some insurance companies and farmers. There are also extensive changes to international tax laws, including a new tax on unrepatriated foreign earnings.
Tax Deductions for Startup Costs
Some of the best small business tax deductions you can take are those related to starting a business.
The IRS defines these startup costs as any expenses required for the creation of a business or any cost of investigating or acquiring a trade or business. These costs can be broken down into two periods — during the creation of the business or investigating creating a business.
These are usually considered capital expenditures because they’re meant to benefit the business over several years.
If you’re purchasing a business, then you may deduct any costs that are accumulated in this process.
For many of these startup costs, you also have the option of amortizing or spreading the expenses out over several years.
In your first year of business, you may deduct up to $5000 in startup costs. There’s a limit of 50,000 in startup costs — after this, you have to amortize the expenses over a 15-year period.
If you know you won’t be making a profit within the first year, you should consider not deducting the expenses within the first year. For example, if you have $30,000 in startup costs, it may benefit you to take a $2,000 deduction over 15 years rather than just deducting $5,000 in the first year.
You also have the option of taking the tax benefit when you close or sell the business. Even though this is an unpopular option, it may be a good idea if you know you won’t turn a profit within the first few years.
Depreciation
If you’ve bought new equipment for your business, knowing how to account for it can be tricky. This is because of depreciation, which can be a confusing concept. Depreciation means the decrease in value of an asset over time due to wear and tear.
In tax terms, this means that you can take the deduction of an asset over several years rather than just in one year.
When it comes to depreciation for tax purposes, there are specific guidelines known as MACRs or Modified Accelerated Cost Recovery System. This may sound complex, but it’s a schedule allows you to depreciate your assets more quickly so you can take a larger deduction in each year that you’re depreciating the asset.
This topic can get more complex as the depreciation period of each asset can vary wildly. For example, automobiles depreciate over five years while nonresidential property depreciates over 39 years.
Just know that you can deduct the cost of your equipment on your business taxes over time.
Phone and Internet Expenses
If these you regularly use the phone or internet for business, then they constitute a necessary and reasonable business expense and convenient tax write-offs. When you use these for personal or nonbusiness activities like personal emails or phone calls, you can only deduct a portion of the expenses related to business activities.
Both phone and internet expenses are utility expenses on your Schedule C Form 1040.
Note that you should keep detailed records of the amount of business use so that you’re prepared in the event of an audit.
Traveling Expenses
If you want the trips you take to qualify for a deduction, they have to be necessary for your business and outside of your tax home. A tax home refers to the area or city where your business is located.
When it comes to taking deductions for travel expenses, you’ll need to keep detailed records of each leaving and returning time the amount of money you spent. You should also note the reason for the trip, track who you met with, and log your mileage if you drive a vehicle.
If you’re curious about what travel items you can deduct, the IRS released a detailed list of all the approved travel expenses for businesses. These include:
- Parking costs and toll expenses
- Dry cleaning
- Use of personal vehicle
- Housing and meals
Note that as of 2018, there are almost no exclusions for fringe travel benefits.
Promotion and Advertising Expenses
Because these expenses are reasonable and necessary for your business, you can deduct them. They can include anything from SEO services to business card printing and marketing expenses.
You should also note that as your advertising brings in more revenue, your taxes will also go up.
The process for claiming these deductions depends on how your business is set up. If you have a partnership or an LLC with several members, then you claim these deductions on Form 1065 line 20. When your business is set up as a sole proprietorship or an LLC with only one member, then you should Schedule C Form 1040.
Salaries and Employee Benefits
If your small business has employees, you may be able to deduct the cost of their benefits and salaries as well as vacation time. Even though in most cases wages and benefits are common business deductions, they do have to meet certain criteria for you to take them.
- Any wages or salaries paid necessary, reasonable and ordinary
- The employees are providing services
- The employee in question is not a partner, an LLC member, or a sole proprietor
When you claim these deductions, you must use line 26 of Schedule C Form 1040.
Investments
If you’ve taken out loans and used the money for investments, you may take a deduction for any interest that you’ve paid on the loan. This interest expense can be deducted up to the income you’ve made on the investment.
These investments include actions like taking out a margin loan to purchase stock. In this case, you can deduct any interest on the margin loans. Note that this doesn’t include investment income on non-taxable investments like municipal bonds.
If you have more interest expenses than investment income, you may carry forward the deduction into the next year.
To claim this deduction, you have to include it in the “Interest You Paid” section of your Schedule A (Form 1040).
Contributions to Retirement Accounts
The most common way to take deductions for retirement is for contributions made to your IRA.
Note that if these contributions are to a Roth IRA, you cannot deduct them from your taxable income.
Charitable Contributions
On the list of tax deductions, one of the most confusing aspects refers to what is allowable when it comes to charitable contributions.
You have to make a donation to a qualified organization as defined by section 170(c) of the IRS code. It basically includes nonprofits, such as foundations created by the U.S. government or religious places of worship.
Medical Care Expenses
If you’re worried about being able to pay for medical expenses as a self-employed, we have some good news. Many of your medical expenses may be deductible. This includes things like inpatient home care, prescription drug expenses, and doctor’s office visits.
Your health care premium may also be tax deductible. If you’re fully self-employed, then all of your insurance premiums for dental and long term care insurance may be deductible.
The Tax Cuts and Jobs Act has also included a new tax credit for paid medical and family leave.
Child and Other Dependent Care Expenses
If you have children or other dependents, you may be able to take a deduction for any expenses related to there to care while you work.
Noe that this may also apply to other dependents. For example, if you have a grandparent or disabled relative who needs care, you may be able to deduct any related expenses.
Energy Efficiency Tax Credits
If your business is planning to go green or uses cleaner sources of energy, you may be entitled to take a deduction. These credits apply to specific improvements.
The Solar Investment Tax credit, for example, allows you to deduct 30% of the cost of installing solar panels from your federal taxes. You can also roll the tax credit over into future years. The drawback is that if you have a power purchase agreement or a lease, then you may not be eligible for the credit because you don’t own the system.
If you work from home, you may receive tax credits for energy efficiency improvements. The Residential Energy Efficient Property Credit provides you with a 30% tax credit for any green energy you install in your house. This includes things like wind turbines and solar energy.
Though this credit expired in 2017, you can still carry forward any unused amount to 2019. You can claim these credits on Form 5695.
Many of these tax credits also extend to things like geothermal heat pumps that comply with federal energy standards and fuel cells.
Foreign Earned Income Exclusion/ Foreign Tax Credit
If you’re an American citizen or resident alien who has worked or lived in a different country, you may be eligible to exclude foreign earned income from your tax return. You may also take the foreign housing exclusion and the foreign housing deduction.
According to section 911 of the tax code, the Foreign Income Exclusion increases with inflation.
To take this deduction, you must meet one of these three criteria:
- Be a U.S. citizen who has lived in one or more foreign countries for a full year
- Be a U.S. citizen or resident who was physically in a country for at least 330 days of the year
- Be a U.S. resident alien and a citizen or national of a country that has an income tax treaty with the United States. You must also have lived in that country for at least one year
If you’ve paid taxes on income earned outside the United States, you may qualify for the foreign tax credit. This is a non-refundable tax credit, meaning that it can decrease your tax liability to zero without leading to a refund or being carried forward to future years. And it is available for both earned income and money made through foreign investments.
Keep in mind that you can only take the foreign exclusion or the tax credit alone.
Want to Watch Your Business Grow?
You know that saving money through tax deductions can help your business, but once you get your refund, do you want to understand how to reinvest it in your company?
If you want more tips on how to run a successful business, contact us today!