Business Taxes: What you Need to Know About 2019 Standard Deductions
It is that time of the year again when US taxpayers will get busy with tax filings and hence every business owner in the country needs to know about the 2019 standard deductions that are available to them. Knowing how to file the tax return and also understanding the deductions that they could avail to reduce tax payments is of critical importance. Facilitating proper documentation and statements for tax preparation purposes is imperative to enjoy optimum tax savings. Here is a definitive guide that can be referred to by small-to-medium-size businesses (SMB’s) when filing the tax to ensure that they have smooth sailing.
The Internal Revenue Service (IRS) in the US has extended the filing deadline for 2019 tax returns from businesses, financial custodians, individuals and all other entities that generate income. The deadline for payment of taxes owed by US citizens was originally April 15, 2020, but due to the COVID-19 crisis, that has been extended to July 15, 2020 without penalty for Federal taxes.
Millions of small business owners and individuals need to identify these tax deductions that they could claim and get a tax break. Claiming all of the tax deductions available to a small business can save them a lot of money, which in turn, can be invested further in their business for growth and expansion. Apart from keeping good credit records, keeping receipts of payments for all kinds of business expenses can help in availing deductions when filing the income tax returns for a small and medium-sized business (SMBs). The given-below comprehensive listing of SMB tax deductions, when understood properly, could prove to be of great benefit for US small businesses.
What is a tax deduction? 2019 Standard Deductions for Businesses
A tax deduction or a tax write-off is an expense that reduces a taxpayer’s liability by deducting the expenses and subtracting them from the taxable income. Claiming for deductions allows one to pay a much-reduced tax bill. However, when filing for tax write-offs, a business owner needs to make sure that the expenses have to match the IRS criteria that apply for a tax deduction. Find below a detailed list of business expenses that can be deducted from the taxable income. The list of write-off is available to businesses that are organized as partnerships or limited liability companies (LLCs) and also businesses having sole proprietorships. While some tax deductions are direct expenses involved in running a business, a few can be categorized as personal deductions that a small business owner should be aware of when filing tax.
Understanding Tax Cuts and Jobs Act Implications
Signing of the Tax Cuts and Jobs Act (TCJA) into law by President Trump in December 2017 brought about far-reaching changes to the tax code. There has been a complete overhaul in the way the tax is being calculated for all taxpayers, including the small business owners and self-employed individuals. One has to take into account the revised tax brackets, tax rates, business cost deductions, raised standard deductions and also the removed personal exemptions brought about by the Act. Certain expenses were also discontinued as part of this Act and the child tax credit was increased. Therefore, small business taxpayers need to determine the amount of tax they have to pay each quarter through the estimated tax system. Being aware of the potential implications of the Tax Cuts and Jobs Act (TCJA) will affect how a business will provide tax-related documents and claim for their 2019 standard deductions when filing taxes.
List Of Small Business Tax Deductions
Although small businesses do understand the relevance of claiming the tax deductions, many find it difficult to identify these write-offs. In fact, as per a Small Business Taxation Survey conducted by the National Small Business Association (NSBA), the stress associated with filing and completing the tax formalities in compliance with the tax rules certainly tops the list of being one of the most stressful, worrying matters of small business owners. Hence, knowing the list of things for which small business owners could claim tax deductions will be helpful.
2019 Standard Deductions: Standard Business Expenses
Here is a roundup of most common 2019 small business standard deductions one should know. These deductions can be claimed by US small businesses on Schedule C of Form 1040 or 1040-SR.
Advertising – Small business owners often spend a lot of money on advertising and promotion of their business. Claiming tax deduction as expenses for such business purposes is 100 percent deductible. Tax write-offs can also be claimed on the following cost aspects of advertising & promotion:
- The cost involved in hiring a designer to create a business logo
- Cost of printing business cards or brochures
- Cost in buying ad space in print or online media
- Cost for sending cards to clients
- Expenses related to the creation and maintenance of a new website
- Expenses of operating a social media marketing campaign
- Gifting item bought as part of the company’s promotional campaign
- Cost of sponsoring a marketing event
However, a business owner cannot claim amounts paid for the lobbying process to influence legislation or to sponsor political campaigns or events.
Car and truck expenses – Small business using a vehicle – be it a truck or a car or a van, can claim the expenses paid towards its operations for tax deductions. Following maintenance and operational costs towards the vehicle can be used as deductibles:
- Loan or lease payments on the car and truck used or business purposes
- Fuel charges
- Payments made on an insurance policy for the vehicle
- Parking and toll fees
- Repair expenses
- Registration fees
Businesses using the car for visiting the client, traveling between the worksites or even running it completing daily business routines can write-off the operating and maintenance costs.
Bad Debt – Businesses with unpaid invoices may use them for a standard tax deduction. However, one needs to provide proper documentation to show that such debts are uncollectible. Other costs that can be deducted are as follows:
- Amount paid by business owners to employees or vendors or their peers that are not repaid.
- Businesses selling goods & services can deduct the costs related to unpaid purchases of products and services.
Bank Fees – Small businesses often maintain a separate bank account and credit card for their business purposes, which is a great thing. The following are the bank fees that may be taken as tax deductions.
- If you incur charges for ATM withdrawal
- Bank charges transfer fees, annual or monthly service charges, or overdraft fees
- Bank transaction fees or merchant fees paid to a third-party payment processor are also deductible.
However, personal bank account charges are not deductible.
Salaries and Wages – Small businesses paying salaries, bonuses, or wages to their employees or labor can use these as tax deductions. Know the certain components of payroll and other compensation that are deductible.
- Costs of employee benefits such as health insurance premiums, education reimbursements
- Per diems and allowances paid to employees
- Expenses involved in purchasing online payroll applications and tools such as payroll software.
- Using the services of contractors or freelancers in your business
- Employer contributions paid for social security and Medicare (FICA) taxes and also contributions for federal (FUTA) and state (SUTA) unemployment taxes can be deducted.
- Commissions, awards, paid family leaves and bonuses paid as part of the employee benefits can also be used for tax deductions.
Rent and Property Leases – There are tax benefits attached to buying or renting an office space. Take a look at how you can save tax with tax deductions filed for the following things:
- Businesses can use the amount paid for purchasing real estate and renting an office space and other business properties.
- Businesses operating from home can use a part of their rent on the home if it is a leased property or also use mortgage interest as deductible under home office operating expenses. Home expenses can be pro-rated based on the square foot of the area used as office space for the business. For example, your total home area is approximately 2000 square feet but you use only 1000 sq. ft for your business use then 50% percentage of the expenses going in that office space is eligible as a deduction. Costs involving the below are also deductible.
- Repairs and maintenance
- Homeowner’s or renter’s insurance
- Cleaning supplies
- Rental amounts on machinery & equipment can also be used as tax deductions
Individuals who own any equity in the building where they rent office space may not claim this deduction on renting & leasing. It is suggested that you keep rent agreement copies or lease agreements to be provided as proof for getting tax deduction benefits. Refer to the guide on this deduction provided by IRS publication as any improper deduction can lead to an audit.
Interest on business loans – When filing for small business tax deductions, businesses also need to factor in the expenses involved in taking out a loan for meeting their growth objectives. Here are certain components of business loans that are considered for tax deductions:
- Interest on business loans
- Interest paid on receiving business credit cards for meeting legitimate business expenses
- Deduction of interest on funds borrowed for investments
However, businesses cannot use interest paid on business loans that are used for personal expenses.
Taxes- Knowing of the deductible taxes can be useful for small businesses to claim write-offs for them and add more savings to their bottom line in a particular tax year. Here is a list of taxes and licenses that are deductible.
- Personal property taxes
- Payroll taxes
- Real estate taxes paid on business property
- State income taxes
- Sales tax
- Excise taxes
- Fuel taxes
- Business licenses
Home Office Deductions
Business travel – Those taking frequent business trips can deduct the expenses borne out of the travel. However, only the following travel expenses are deductible.
- Costs of transportation either by car, bus, train, airplane, etc
- Accommodations & meals
- Shipping materials
- Business phone calls and tips
- Standard mileage rate
However, owners or employees traveling for business cannot seek tax deduction for the travel costs of their accompanying friends and family members. The claim amount is determined by the length of stay, time spent on business dealings and destination among other factors. Make sure that you understand the IRS requirements before deducting costs made on business travel.
Qualified Business Income – When claiming 2019 small business tax deductions, taxpayers can seek a 20% deduction on qualified business income. This applies to businesses categorized as sole proprietors, S corporation and partnerships, otherwise known as pass-thru entities. However, given it is a new rule, advice from professional tax experts can be used to understand what parts of business income are tax-deductible.
Insurance – Taking out insurance for business is a wise idea. Insurance policy not only protects the company’s welfare interests but also helps in getting tax savings. Know how you can reduce your tax burden with insurance policies.
- Premiums you pay on taking out an insurance policy for business can be used for tax deductions
- Business risk coverage, business malpractice and other kinds of risks are fully deductible. A healthcare tax credit of up to 50% on their insurance premiums can be claimed by small business owners under the Affordable Care Act.
- Costs related to taking policies such as commercial auto insurance, liability insurance, cyber security insurance, business interruption insurance, and property insurance, as well as health and life insurance premiums paid for employees
Bonus Depreciation – Small businesses in the very first year of owning a business property can take a higher percentage of a new capital asset’s cost as a tax deduction which is also known as Bonus depreciation. This is generally applicable to computers, machinery and other furniture required for day to day work. Used property is generally not eligible for bonus depreciation. This deduction is available in the first few years of new machinery. The method of claiming the deduction is a bit complicated and it is best to seek professional advisory help.
Retirement Plans – In the US, contributions to a private retirement plan will be considered as write-offs. You can also claim contributions to qualified retirement plans like SEP IRAs, SIMPLE IRAs, and 401(k)s. However, these are subjected to certain limits as prescribed by the IRS.
Other Tax Deductions – Below is the list of other general tax-deductible expenses which Small business owners should be aware of.
- Charitable Donations
- Conventions and Trade Shows
- Legal, Accounting and Professional Fees
- Maintenance, Repairs, and Renovations
- Meals and Entertainment
- Non-Cash Gifts and Rewards
- Office Supplies, Tools and Services
- Research and Development (R&D)
- Capital Expenses, including startup and organizational costs
- Self-Employed Expenses, including self-employment taxes, moving expenses, social security and Medicare taxes
Find out which among the above-pointed expenses apply to your 2019 tax return. Discuss and review with CPA or tax advisors how the tax deductions will impact your tax year for tax estimation and future business planning. Keep a record of all the costs related to running your small business. Take advisory support of professional tax experts and accountants to analyze the expenses of every tax–year to take optimum benefit of every legitimate deduction. Availing tax deductions is a smart way to reduce the amount of taxes one needs to pay, and keeping a tab of all tax-deductible expenses will allow you to keep those deductions if the IRS ever conducts an audit. Keep your book of accounts up-to-date and use the right management and employ best tax practices to maximize tax deductions and avert last-minute tax filing mistakes.