Five Small Business Tax Deductions That Can Help Reduce Your Taxable Income
For many small businesses, the end of the calendar year means it’s time to start getting financial records ready for tax season. If you’re looking for some tactics that can help you reduce your tax burden before you file for the year, you are not alone.
Here are five tax strategies for small businesses that you can use to reduce your taxable income for 2020:
1. Fund a Qualified Retirement Plan
An employer-provided retirement plan is a nice benefit to offer your employees and, on top of that, the contributions to select plans are tax-deductible. Common options for small business owners include:
- Solo 401(k)
- Self-Employed Pension
- Simple IRA
While many small business tax deductions must be taken by the end of the calendar year you are filing for, contributions made to select retirement plans, including those listed above, can be deducted up until the tax deadline in April. Additionally, if you apply for and are granted an extension, you can even deduct contributions made until the extension deadline in October.
You can contact a wealth manager at Northwest Wealth Management today to learn more about which retirement plan is best for you and your business.
2. Take Advantage of Generous Depreciation Deductions
When the Tax Cuts and Jobs Act was signed into law in December of 2017, it came with some very generous depreciation rules. Under this law, you are allowed to write off up to $1 million on equipment purchased during the calendar year. You also get a 100% bonus depreciation allowance for the first year.
For example, if you bought $1,150,000 worth of assets this year, you will be able to deduct the $1 million maximum, as well as the remaining $150,000 with the 100% bonus depreciation allowance. For those with a 35% tax rate, that would equal a savings of $402,500 for making the purchase. If you’ve been putting off a major equipment purchase, it could be wise to consider making that investment before the end of the year.
3. Write Off Bad Debts
If you have an uncollectable account on your books, their debt can be written off. If you have a customer or client that isn’t paying their bills and you’ve exhausted your options for collecting, you can, and should, write off that debt.
4. Take a Home Office Deduction
In 2020, more small business owners began working from home. If you’re one of them, you may be able to deduct expenses for the business use of your home. The IRS allows both homeowners and renters to claim a home office deduction, provided the space meets these two requirements:
- Regular and exclusive use: The space must be used exclusively for business purposes. If you are using a room as both your office and a guest bedroom, the room is ineligible for the deduction.
- Principal place of business: Your home office must be your primary place of business, meaning you don’t have another office elsewhere.
5. Deduct Vehicle Mileage
A deduction that is frequently missed by small business owners is the mileage on a vehicle that is used for business. You can deduct mileage for 2020 at a rate of 57.5 cents per mile, but you must have documented your use throughout the year. For example, if you recorded 10,500 business miles, you would gain a deduction of $6,037.50 for the year.
To document your business mileage, start by noting your odometer reading at the beginning of the year and at the end of the year, so you can calculate what percentage of miles were for business purposes. Then you will want to keep a driving log by recording your odometer reading at the beginning and end of each business trip. You can do this with an old school spreadsheet on your computer, or there are several mobile apps that can help you keep track.
Get Advice From the Experts
When it comes to making the best decisions and ensuring you’re not missing out on any essential small business tax deductions, consult the experts in your corner. There is a lot of information online, but your attorney, CPA and tax preparer will be able to customize their advice to your specific situation.
In the meantime, while you’re setting up a time to talk with your CPA, you can visit the IRS website to learn more about tax deductions for your small business.
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