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unixcommerce · 5 years ago

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Top 25 Small Business Tax Deductions

Deductible business expenses help entrepreneurs with many of the costs of running a company. Business owners know that most expenditures can be written off, although there may be limits and timing. Check out the most common tax deductions for small business.

Last Spring the IRS released data showing the common deductions taken on sole proprietorship returns. Other entities claim the same types of deductions — C corporations, S corporations, partnerships, and limited liability companies (LLCs), although you may find slightly different rules for some deductions.

See which ones apply to your 2019 tax return and think about which may impact your 2020 tax year for purposes of estimating taxes and business planning.

See a roundup of the most common tax deductions claimed on Schedule C of Form 1040 or 1040-SR by sole proprietors (including independent contractors and one-member limited liability companies not reporting elsewhere) as determined by the dollar amounts. The first three categories produce by far the largest write-offs.

Note: This list has been specially updated for the 2019/2020 tax season.

Top Small Business Tax Deductions

1. Car and truck expenses. Most small businesses use a vehicle, such as a car, light truck or van. Deduct the cost of operating the vehicle for business only if you require records to prove business usage. In deducting costs, you can eliminate the need to keep records of cost (e.g., gasoline, oil changes) if you rely on the IRS standard mileage rate of 58 cents per mile in 2019 instead of deducting your actual outlays. Use the standard mileage rate whether you own or lease the vehicle. But whether you deduct actual costs or use the standard mileage rate, you still need a record of the business mileage.

2. 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.

3. 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). Note that for services performed by your independent contractors in 2020 and later, Form 1099-NEC replaces the 1099-MISC.

4. 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 items are treated as non-incidental materials and supplies. They are deductible business expenses when purchased or furnished to customers, whichever is later.

5. Depreciation. Deduction this as 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 ($1,020,000 in 2019; $1,040,000 in 2020). 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 100% for property acquired and placed in service in 2019 (as well as in 2020).

6. Rent on business property. Fully deduct the cost of renting space — an office, boutique, storefront, factory, or other type of facility.

7. Utilities. Fully deduct electricity for your facility. Other utility costs include your mobile phone charges. You cannot claim a deduction for the cost of the first landline to your home if you claim a home office deduction and have a landline. Claim a second line, as a deductible utility cost as well.

8. Taxes. Deduct licenses, regulatory fees and taxes on real estate and personal property. And fully deduct your employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes. However, self-employed business owners cannot claim a business deduction for half of their self-employment tax; record it as an adjustment to gross income on your personal income tax return.

And owners of pass-through entities cannot treat their state and local income taxes on business income as a business write-off. These are personal taxes deductible only on Schedule A of Form 1040 or 1040-SR (and for 2018 through 2025, are subject to a $10,000 cap for all state and local taxes).

9. 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.

10. 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.

11. Commissions and fees. They are fully deductible and may require you to report them on Form 1099-MISC for 2019 (Form 1099-NEC for payments in 2020) (see item #3). However, commissions paid in connection with buying realty are not deductible; they are added to the basis of the property and usually are recovered through depreciation.

12. Travel. If you or staff members travel out of town on business, you’ll find the cost of transportation (e.g., airfare) and lodging fully deductible. You must meet substantiation requirements to claim any travel deduction. IRS Publication 463 explains this in more detail. However, local commuting costs usually remain nondeductible.

13. Advertising. You may fully deduct ordinary advertising costs too.

14. Home office. Deduct a portion of personal expenses of a home as a business expense if you use the home regularly and exclusively as the principal place of business, a place to meet or deal with clients or customers, or as a separate structure used in the business. The deduction includes both direct costs (e.g., painting a home office) and indirect costs (e.g., the percentage of rent or mortgage interest and real estate taxes that reflect the percentage of business use of the residence).

15. Legal and professional fees. You can fully deduct accounting fees. The deductibility of legal fees depends on what you use them for. You may also fully deduct the cost for reviewing a contract or lease. However, you cannot deduct the cost for handling the closing on a property purchase; then add to the basis of the property.

16. Meals. Deduct these costs as a business expense only up to 50%. Although fully deductible meals do exist. Thus, you pay for half of a business lunch and Uncle Sam pays for the other. And you can only claim the deduction if you substantiate the expense (see IRS Publication 463).

17. Rent on machinery and equipment. Fees paid to lease or rent items used in your business are fully deductible.

18. Interest on business indebtedness. You can usually fully deduct interest on loans that the business takes as a business expense (e.g., interest on a line of credit used in a construction business). However, businesses with average annual gross receipts in the three prior years of more than $26 million in 2019 (or 2020) must limit the percentage of interest that’s deductible. And interest on loans by owners to buy their businesses are treated differently. Distinguish business interest from an owner’s investment interest or passive activity interest, which is not a business deduction.

For example, an individual who takes a personal loan to buy shares in an S corporation must allocate the debt proceeds to the business assets. Assuming you use the assets in the business, then your interest counts as deductible business interest. If some assets include investments, then you may consider a portion of the interest investment interest. You can count this as a personal deduction limited to the extent of net investment income. If some assets relate to a passive activity, such as rental realty, the allocable interest counts as passive activity interest subject to the passive activity loss limitation.

19. Employee benefit programs and qualified retirement plans. You may deduct the cost of employee benefit programs, such as education assistance and dependent care assistance, as well as contributions to employees’ qualified retirement plan accounts. For self-employed individuals, contributions to their own qualified retirement plan accounts are personal deductions claimed on Form 1040 or 1040-SR.

20. Mortgage interest. Deduct mortgage interest if your business owns realty. The law caps interest on a personal residence. But no cap exists on the size of loans on which interest can be claimed.

21. Office expenses. Flowers, fish tanks, magazine subscriptions to spruce up your office are deductible.

22. Carryovers. If you previously had a bad year, you may still have a net operating loss carryover that you can use to reduce your current income and cut your tax bill. Also check for home office deduction carryover that was previously barred because of a taxable income limitation.

23. Bad debts. Some businesses report on the accrual method of accounting and possess unpaid receivables or other debts. These businesses should take a deduction for anything that’s partially or wholly worthless.

24. Miscellaneous business deductions. Even if an expense doesn’t fit neatly into any of the categories listed above, you may still find it deductible as long as it’s “ordinary and necessary” for the business.

25. QBI deduction. While you take a personal write-off on an owner’s Form 1040 or 1040-SR, you base this on business income from a pass-through entity. The qualified business income (QBI) deduction lowers the effective tax rate paid on business profits on owners’ personal returns. The deduction makes up 20% of QBI. But you may find many limits to restrict or bar eligibility to claim any write-off.

Deductible Business Expenses

Determine which of these 25 tax deductions for small business to take on your 2019 business return. Also, project which items you need to take into account for 2020 estimated taxes. Discuss your situation with your CPA or other tax advisors to make sure you have done all that is required to qualify for a specific deduction.

See more deductions that are often overlooked: Take Advantage of Overlooked Business Deductions – Read These 10 Suggestions

Image: Depositphotos.com

This article, “Top 25 Small Business Tax Deductions” was first published on Small Business Trends

https://smallbiztrends.com/

The post Top 25 Small Business Tax Deductions appeared first on Unix Commerce.

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elizabethcariasa · 7 years ago

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Know what's taxable or not before filing your return

Money courtesy Pictures of Money via Flickr

Most of us can't afford extravagant wardrobes. And we own, at most, one house. But for many of us, there's one thing that most of us share with lavish-living Paul J. Manafort.

We, like the former lobbyist and political consultant, are not fans of paying taxes, especially really big Internal Revenue Service bills.

Rick Gates, Manafort's former right-hand man, today told jurors hearing the tax evasion and bank fraud charges against his former boss that Manafort disliked paying a lot of taxes.

But, I hope, that we aren't following Manafort's alleged method to reduce our tax bills.

Under reporting income: Federal prosecutors contend that Manafort, with Gates' help, failed to properly report all of his earnings.

Gates, seated in the Alexandria, Virginia, federal courtroom's witness stand, echoed earlier testimony from a tax accountant that Manafort opted to classify some of his income as nontaxable loans.

Meanwhile, as the tax trial of Donald J. Trump's former campaign manager continues, the Wall Street Journal reports that Trump's former personal attorney also could be facing tax evasion charges of his own.

The newspaper says investigators are assessing whether Michael Cohen under reported income from his taxi-medallion business. That income reportedly included hundreds of thousands of dollars received in cash and other payments over the last five years.

Taxable vs. nontaxable income: Prosecutors, defense attorneys and ultimately jurors will decide whether former Trump confidants evaded their tax responsibilities.

But the charges offer a good opening for us regular folks to review what the Internal Revenue Service considers taxable or nontaxable income.

Basically, Uncle Sam does get his cut of a lot of our money at tax time. But not all of it. Here's an overview of taxable, nontaxable and may be taxable income.

Taxable Income

Alimony. Alimony you receive from your ex-spouse is taxable income, but only through the end of this tax year. Under the Tax Cuts and Jobs Act (TCJA), alimony payments won't be counted as taxable income for tax years 2019 through 2025. Also during those years, alimony payments will no longer be deductible by the payer.

Barter payments. Barter income is taxable. This means that if you, for example, build a cabinet system for your dentist in exchange for a root canal, you must pay tax on the fair market value of the dental services. Yeah, I know, tax insult added to dental pain.

Bonus from employer. If you receive a bonus, it is in most cases taxable income. Your boss should include the extra income on your W-2 form.

Canceled debt. You finally got out from under a big part of your debt when you convinced the lender to forgive it. Sorry, but the IRS isn't nearly as nice in these cases. In most instances, a debt that is canceled or forgiven is considered taxable income.

Cash. One of the biggest filing misconceptions is that cash, or at least some of it, is not taxable. Not true. All cash payments for your work are taxable, regardless of how much or little. The confusion comes from the IRS requirement that payers don't have to report such payments if they are less than $600. But that $599 in various dollar denominations you got for pool cleaning services is all taxable. Even if you don't get a 1099-MISC.

Gambling payouts. Gambling income is taxable at the federal level to the extent that it exceeds your gambling losses for the year. Some states, however, don't tax certain types of gambling proceeds.

Hobby income. Hobby income is taxable. You used to be able to deduct expenses incurred to participate in your hobby from any income it produced. But that was limited by the miscellaneous itemized expense threshold of 2 percent of your adjusted gross income. Now even that is gone, at least for tax years 2018 through 2025, thanks to the Tax Cuts and Jobs Act. If you are making money from your hobby, you might want to consider turning it into a business, where you'll have more expense deduction flexibility.

Interest and dividends. This investment income is known as unearned income. But it's still taxable. This is true even when you reinvest the dividends. So are profits you make, at capital gains tax rates, if you eventually sell the assets that are producing the interest and dividends. A key exception here is interest paid on certain government obligations, such as municipal bond interest. These amounts are not taxable by the federal government and, depending on where the bonds are issued, by some state tax departments.

Jury duty pay. Jury duty pay is taxable as miscellaneous income. If, however, you turn over your jury duty pay to your employer so that you were still paid while you were off the job serving on a jury, you can deduct that amount.

Side hustle earnings. You're still getting a regular paycheck, but you drive for an app-based transportation company or do odd jobs for your neighbors for a few extra bucks. That supplemental gig income is taxable. You might be able to reduce the amount somewhat by claiming legitimate side-hustle expenses. But don't try to just ignore these extra earnings.

Traditional retirement plan withdrawals. Money that goes into these accounts is made before taxes are computed. That means that you'll owe the tax that's been deferred while the retirement plan has been growing over the years. This applies to traditional IRAs and basic 401(k) company retirement plans.

Unemployment benefits. It's definitely no fun to lose your job. The only thing worse is that when you collect unemployment benefits, that money is taxable.

Not Taxable Income

Roth IRA withdrawals. You can take money from a Roth IRA without paying income tax in a couple of situations. First, since you paid tax on the money before you put it into a Roth retirement account, you can take that contributed money out at any time. As for the account's earnings, those are tax-free as long as you are at least age 59½ and have held the Roth IRA for at least five years. If you take the earnings out earlier, you'll owe a 10 percent penalty on these so-called early distributions.

Child Support. Money you receive that is designated as child support is not taxable. While tax law regarding alimony will change next year, the tax-free status of child support money will remain.

Combat pay. Combat pay is not subject to income tax.

Inheritance received. A lot of folks, swayed by political complaints about the misnamed death tax, think that the $10,000 Uncle Buck left them is taxable. It's not. All inheritances are tax-free, at least at the federal level. The estate tax is paid by just that, the estate a person leaves, before any heirs get their bequests. But be sure to check with your state tax department. A few states do tax the recipients of inheritances.

Maybe, maybe not taxable

Gain from the sale of a home. If you sell your home at a gain, up to $250,000 in profit (or $500,000 if you're married and file a joint tax return) is tax free. That means that most of us will never face a tax bill for selling our primary residence as long as we've owned and lived in the home for two of the last five years. However, if you're lucky enough to make an even bigger profit, the amount in excess of those exclusion amounts is taxable. But at least it's at the lower capital gains tax rates.

Social Security benefits. If your only source of retirement money is Social Security, those benefits aren't taxable. But if you have other income, either from a part-time job or your own savings or investments, depending on your income you could owe income tax on up to 85 percent of your Social Security benefits.

Court awards and damages. These are taxable depending on what the legal payments cover. Any awards you receive for lost pay, punitive damages, business damages or the like are taxable. But damages for physical injury or sickness or for emotional distress are tax-free.

Disability benefits. You generally pay tax on disability benefits if your employer paid the disability insurance premiums. However, if you paid the premiums yourself, the benefits are not taxable.

Garage sale proceeds. Most garage sale items go at bargain prices, meaning you sold them for less (usually much less) than what you originally paid for them. Since you don't make a profit on the yard sale items, then you don't have any taxable gain. If, however, you sell that painting Aunt Millie gave you and which turned out to be a portrait of her by a young Pablo Picasso (you knew she had a secret life!) for a nice sum, that gain is taxable, again at capital gains rates.

Gifts. A gift if just that. It's something you got from someone — often family, but also your very good friends — who just wanted to do something nice for you. In this case, Uncle Sam also does something nice. He says you don't owe tax on gifts you receive. This includes financial gifts, such as money to help you purchase your own home, or other assets, such as a family heirloom you can use to help furnish your new place.

More taxable or not situations: As this overview shows, there are lots of things to consider when it comes to taxable or nontaxable income.

A more complete collection is in IRS Publication 525, aptly name Taxable and Nontaxable Income. The current edition is up to date as far as 2017 taxes, but the IRS will issue an update with the TCJA changes. So bookmark the publication's web page and keep checking.

And remember, if you have any concerns about whether something is legally within the IRS' reach, talk with a tax professional.

It's always wiser and more cost-effective to get the pre-emptive tax help than have to hire a tax accountant or attorney later, like Manafort and possibly Cohen, to deal with IRS tax evasion questions.

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christophergill8 · 7 years ago