[This article has been updated to reflect the new tax law that went into effect on January 1, 2018]
Every year at tax time, millions of American business owners leave some of their own money on the table. Whether it’s because they fail to claim their fair share of business tax credits and deductions, or because they’re disorganized when it comes to their tax preparation and accounting, this represents a huge missed opportunity.
By applying these small business tax tips, you can help ensure that you’re not missing out on tax credits and deductions that you deserve, and get yourself more organized.
Credits and Deductions You May Have Missed
20% Deduction for Pass-Through Entities
One of the biggest changes in the new tax law that took effect on Jan. 1, 2018 is the new 20% business income deduction for pass-through entities (such as LLCs, partnerships, and sole proprietorships). This deduction does not apply for 2017 income, but it will apply to your business income for 2018 (assuming you qualify; there are some limitations to this deduction for professional services business owners with income of more than $157,500 for single filers, $315,000 for married filing jointly). So, at tax time, take a look at your business entity and filing status, and talk with your accountant to see if you are qualified for this new 20% pass-through deduction.
Does your business require you to be on the road, or in the air? There are a number of business travel deductions you can take that go beyond the standard business mileage rate of 53.5 cents per mile. Business travel expenses such as airfare, hotel stays, trade conventions, meals while traveling, and laundry/dry cleaning bills may be eligible deductions.
Compensation that you provide to your employees is often tax deductible. This can go beyond wages to include bonuses, commissions, and paid sick or vacation leave, as well as fringe benefits such as life insurance and educational assistance plans.
Rent and Utilities
If you lease the space you use for your business, you may be able to deduct some or all of the rent paid to your landlord. In addition, your business’s utility bills such as electric, gas, water, and phone service may also be deductible.
Hiring Veterans and Other Targeted Groups
Did you hire an unemployed veteran in the last year? If so, you may be eligible for a Work Opportunity Credit. Employees who are members of other targeted groups, such as qualified ex-felons or summer youth employees, may also entitle you to the credit.
Did you know that you can generally deduct your business insurance premiums? This includes insurance for your small business such as:
- Workers’ compensation insurance
- Commercial property insurance
- Liability insurance
- Commercial auto insurance
- Malpractice insurance
- Employee health insurance
- Employee life insurance
If you provide health insurance and your business has fewer than 25 employees, you may also be able to qualify for the Small Business Health Care Tax Credit.
If your business was a victim of a hurricane, flood or another event in a declared disaster area, you may be eligible to take a deduction on uninsured property losses your business incurred due to the disaster. Keep in mind that if your business received any disaster relief grants, those payments may be taxable.
Under the new tax law, in order for personal casualty losses to be claimed, they must be attributed to a disaster as declared by the president. This change does not affect business casualty losses, but it is good to keep in mind in case your business and personal property are both affected by a disaster: Under the new law, you can still claim deductions for business disaster losses, but you might not be able to claim a deduction for your personal losses.
Research and Development
There is a popular business tax credit that gives businesses, of all sizes and in many industries, a tax break for business expenses related to research and development.
Many small business owners wrongly believe that they are not allowed to claim the R&D Tax Credit, but, depending on what type of business you’re in and what kind of research, innovation, and experimentation work you pay for — whether it’s with in-house employees or external contractors — you might be able to use this credit to save money on your taxes.
Section 179 Deductions for Business Equipment/Property
Have you purchased any new business equipment recently? You might be able to claim it as a Section 179 deduction. The new tax law has increased the amount of qualifying expenses that you can claim under Section 179 from $500,000 to $1 million each year.
Another provision of the new tax law is “bonus depreciation” (under Section 168(k) of the tax code), which has been expanded to allow companies to immediately deduct 100% of the value of newly purchased qualified property purchased for business use during the current tax year (starting with 2018, through 2022). Bonus depreciation gives you more flexibility in deciding when to claim the depreciation of your business equipment on your taxes.
For example, if you are having a highly profitable year, you may choose to claim the full depreciation deduction this year, thus getting the biggest tax benefit in a year when your tax rate is unusually high. Or, if you are currently in a lower tax bracket and — after investing in new business equipment —you expect your income to increase in the next five years, you could spread out the depreciation over the next few years to reduce your taxes in the future.
Organization, Preparation, and Filing
As a small business owner, you may feel overwhelmed by all the tax laws, regulations, and paperwork involved in filing. And you probably already know that, if you fail to comply with tax filing requirements, the penalties imposed by the IRS can be costly.
By applying some of the organizational skills that make you a successful small business owner, you can help make the tax preparation and filing process go a bit smoother.
It may seem obvious, but adequate recordkeeping not only helps you keep track of your bookkeeping and accounting, but it also can come in handy when it comes to substantiating income, expenses, and possible deductions and credits.
All tax-related documentation should be stored in a safe place for at least three to seven years, depending on your situation. If you are ever audited by the IRS, you will be glad you have all of your documentation readily available.
Many small businesses are eligible to e-File their tax returns. This quick and easy way of filing online eliminates the paper from the process, and saves you that trip to the Post Office on Tax Day. If you owe taxes, you can authorize a payment directly from your bank account. If you will receive a refund, it can be directly deposited into your account.
Be Alert to Identity Theft
It’s an unfortunate fact that identity theft is a growing problem. If you receive a notification from the IRS or become alerted to a possible identity theft situation, be sure to take immediate action and respond to the contact information on the notice. Possible identity theft red flags include:
- IRS records that indicate you earned more than you actually did
- Evidence that multiple tax returns are being filed in your name
- Receiving a notification that your state or federal benefits are changing due to the agency’s receiving information about an invalid income change.
If your current tax records are not affected, but you suspect you could be a victim of identity theft due to a lost wallet or questionable activity on a credit card or credit report, contact the IRS Identity Protection Specialized Unit at 800-908-4490.
For more information on preparing and filing taxes for your small business, or for more information regarding any of the deductions or credits mentioned here, please contact your tax professional or visit the IRS Small Business and Self-Employed Tax Center.