With the Tax Cuts and Jobs Act going into effect in 2018, there will be big changes in taxes this year. Small businesses will have opportunities to write off some of their expenses from last year, some you’re familiar with, plus some new tax deductions. Study up on how to take advantage of deductions this year and save your company some cash.
New deductions for pass-through entities
Pass-through entities include sole proprietorships, limited liability corporations, partnerships and S corporations. These businesses do not pay taxes as a corporation, so the tax is passed through to the owner and subject to individual tax rates; however, these owners can now take a deduction up to 20 percent of their business income on their individual returns. This is in addition to other business deductions listed below. Whether you qualify for the deduction and the amount of the deduction depends on income earned, marital status, number of employees and type of service or product provided.
Electronics and software
If you need it do business, chances are you can deduct it. Laptops, tablets, smartphones and other small electronic items can be claimed if under $2,500. Software also qualifies, but cannot be proprietary and does not include websites or databases. Items must be claimed in the year they were purchased.
Items costing more than $2,500 do not qualify for this deduction, but may qualify for bonus depreciation. Under TCJA, bonus depreciation is now 100 percent
Home office deductions are no longer available to individual employees under TCJA. However, individuals who file a Schedule C, or sole proprietors with a profitable business can claim a home office.
To qualify, the home office must be used exclusively for business. This does not have to be a whole room. Measure the square footage of the room used as an office and calculate the cost as a fraction of the cost of rent/mortgage, electricity and other costs.
Office supplies are also deductible. Save those receipts!
Travel and meals
Under the new legislation, businesses are no longer allowed to deduct entertainment expenses. Meals are still deductible up to 50 percent. Lodging and company cars qualify for a deduction.
If you kept accurate records of miles driven for your business, you can deduct your mileage at a rate of 54.5 cents per mile. Remember to also track tolls, parking, gas and insurance, and to track business mileage against personal use. Include any lease payments or auto loan interest and depreciation. If you drive to an office, drives to and from your office cannot be claimed. If you claimed your car as a personal property expense used more than 50 percent of the time for business (Section 179) or have depreciated it, you cannot claim mileage.
If you’re a sole proprietor and paying for your own health insurance you can likely deduct your premium. You don’t qualify if the deduction is greater than your business’ net profit, and if you were eligible for health insurance elsewhere, like through your spouse’s employer.
If you’re contributing to your own retirement plan, such as a 401(k) or SEP IRA, you can deduct your contribution on your personal return.
Social security payments can take a big chunk out paydays for the self-employed and small businesses. Fortunately, you deduct half of these payments.
For more information about the deductions that could benefit your small business, contact a tax preparation specialist at Patin and Associates.