Top 10 Tax Deductions for Small Business
Small Business Trends by Barbara Weltman
December 17 – Deductible business expenses help entrepreneurs with many of the costs of running a company. Business owners can write off most expenditures, although there may be limits and timing issues. So what are the most common tax deductions for small business? Last fall the IRS released data on sole proprietorship returns. Other entities can claim the same types of deductions — C corporations, S corporations, partnerships, and limited liability companies (LLCs) (although there may be slightly different rules for some deductions). See which ones apply to your 2018 tax return and think about which may impact your 2019 tax year for purposes of estimating taxes and business planning.
Here is a roundup of the most common tax deductions that were claimed on Schedule C of Form 1040 by sole proprietors (including independent contractors and one-member limited liability companies not reporting elsewhere) as determined by the dollar amounts, starting with the largest category. This list applies to the 2018/2019 tax season.
Top Tax Deductions for Small Business
- Car and truck expenses.Most small businesses use a vehicle, such as a car, light truck or van. The cost of operating the vehicle for business is deductible only if there are required records to prove business usage. In deducting costs, the need to keep records of cost (e.g., gasoline, oil changes) is eliminated if you rely on the IRS standard mileage rate of 54.5 cents per mile in 2018 instead of deducting your actual outlays. You can use the standard mileage rate whether you own or lease the vehicle.
- Salaries and wages.Payments to employees, including salaries, wages, bonuses, commissions, and taxable fringe benefits, are deductible business expenses for the business. (For employee benefit programs, such as retirement plan contributions, see item #19.) Of course, payments to sole proprietors, partners, and LLC members are not wages (i.e., they are not deductible business expenses) because these owners aren’t employees.
- Contract labor.Many small businesses use freelancers or independent contractors to meet their labor needs. The cost of such contract labor is deductible. Be sure to issue Form 1099-MISC to any such contractor receiving $600 or more from you in the year (if payment is made to the contractor via credit card or PayPal, it’s up to the processor to issue them Form 1099-K, but you may want to send your own 1099-MISC for personal protection).
- Supplies.The cost of items used in a business (e.g., cleaning supplies for a cleaning service) as well as postage are fully deductible business expenses. Also, if you opt to use a de minimis safe harbor allowing you to deduct the cost of tangible property (e.g., tablets, vacuum cleaners) rather than depreciating the, the items are treated as non-incidental materials and supplies. They are deductible business expenses when purchased or furnished to customers, whichever is later.
- Depreciation.This deduction is an allowance for the cost of buying property for your business. It includes the Section 179 deduction for equipment purchases up to a dollar limit ($510,000 in 2017; $1 million in 2018). Certain other limits also apply. The depreciation category also includes a bonus depreciation allowance, which is another type of write-off in the year costs are paid or incurred. The limit is 50% for property acquired and placed in service through September 26, 2017, and 100% for property acquired and placed in service after September 27, 2017.
- Rent on business property.The cost of renting space — an office, boutique, storefront, factory, or other type of facility — is fully deductible, and Electricity for your facility is fully deductible. Other utility costs include your mobile phone charges. If you claim a home office deduction and have a landline, the cost of the first landline to your home is not deductible. If you have a second line, it is a deductible utility cost. Businesses that own realty can fully deduct mortgage interest. Unlike interest on a personal residence, there is no cap on the size of loans on which interest can be claimed.
- Taxes.You can deduct licenses, regulatory fees and taxes on real estate and personal property. Your employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes, are fully deductible business expenses. However, for self-employed business owners, the deduction for half of your self-employment tax is not a business deduction; it is an adjustment to gross income on your personal income tax return.
- Insurance.The costs of your business owner’s policy, malpractice coverage, flood insurance, cyber liability coverage, and business continuation insurance are all fully deductible. However, there are two rules to note for health coverage. A small business may qualify to claim a tax credit for up to 50% of the premiums paid for employees (a better tax break than a deduction). Also the cost of health coverage for self-employed individuals and more-than-2% S corporation shareholders is not a business deduction. Instead, the premiums are deducted on the owner’s personal tax return.
- Repairs.The cost of ordinary repairs and maintenance are fully deductible, while costs that add to the property’s value are usually capitalized and recovered through depreciation. However, there are various safe harbor rules that allow for an immediate deduction in any event.
As I have mentioned many times, never guess about what is and is not a deduction, always ask a tax professional to answer the “tough” questions. Give me call to assist you with finding YOUR opportunity. 830-279-2660 for an appointment.
This work is supported by the USDA National Institute of Food and Agriculture, 1890 Extension Formula Program projects under Section 1444.
Phyllis R. Varnon
Prairie View A & M University
Community Economic Development
Extension Agent
Zavala, Dimmit and Uvalde Counties
(830) 374-2881