Always consult your CPA or tax specialist on information concerning anything you hear from someone who is not…like me.
Basic information: The IRS allows businesses to deduct the cost of doing business. One main requirement the IRS has is that the business expense needs to be common or ordinary and necessary.
Start-up deduction: The IRS allows a $5,000 deduction for a start-up business. An instance would be if you spent money on marketing, travel, and costs associated with setting up suppliers or distributors. Once you open your business all business expenses are deductible.
20% business income deduction: The IRS allows a 20% business income deduction for small businesses. This helps significantly with reducing the 15.3% self-employment tax. Being able to take the 20% business income deduction could reduce your marginal tax rate to 29.6%. Please note there are some qualifications that must be met. Please consult your CPA for more information.
Depreciation write-off: Most have heard of Section 179 and its accelerated depreciation write-off. What this means is that business owners can write-off the entire cost of a new purchase in one year as opposed to several years. Think of things like embroidery machines, transfer printers, wide-format printers, DTG printers, as well as phone systems and computers. This year the 179 limit is $1,020,000. Please consult your CPA on how best to use this incredible write-off.
Deduction for health insurance: You can deduct the entire cost of your health insurance premium. This is only allowed when you are making a profit. If you incur a loss you are not allowed to deduct this item.
Deduction for home office: If your office is at home or you use it part-time for business then you can claim a home office deduction for expenses like mortgage, rent, utilities, and even cleaning costs. A requirement is that a portion of the home must be used exclusively and on a regular basis for business. The calculation used is the number of square feet used times $5 for a max write-off of $1,500.
Retirement plan deduction: It is always smart to plan for your retirement. The IRS allows some nice deductions to promote saving. There are several plans for small business owners and their employees. There are 401(k) plans and different IRA plans like Simple, SEP, and a plain IRA. Please note that a ROTH IRA pays taxes on money as it goes in not when withdrawn. Please consult a financial advisor for more information.
Here are a few other seldom-used write-offs:
Meal expenses: The IRS allows a write-off of 50% on meals where business is discussed, and the business owner and client are there as well. There is also a travel per diem for meals when traveling for business. The rate is $60-$71 depending on where you are traveling. Go to IRS.gov for more information.
Business travel: When traveling for business you are allowed to write-off the cost of getting to and returning from your destination.
Business gifts: A business owner is allowed to deduct up to $25 per gift for gifts given to business clients and employees.
TCJA family & medical leave: This gets slightly complicated but there is good information online concerning this write-off.
Work opportunity credit: Again, there is good information online concerning this write-off. Basically, it applies to businesses that hire certain targeted employees like military veterans.
These are a few write-offs of which some small business owners are not aware. As I said, it is vital to consult a CPA. In fact, the best possible advice I can give to any small business owner is to hire a good reputable CPA. In most cases, this is a wise investment.