The Top Tax Breaks for Small Business Owners | When operating your business, you have a lot going on and a lot to consider. You have to create a smart strategy to help ensure that you earn a healthy profit at the end of the year. Because of this, you must remain up to date on the latest tax rules and regulations.
Understanding your taxes and your business is going to help to improve your bottom line ultimately. Keep reading to learn more about tax incentives, such as breaks for installing solar panels and other tax benefits that your business may be eligible to receive.
Understand the Basic Rules
Usually, a business can deduct the cost of operating the business. However, for something to be considered deductible, the IRS requires that the expenses be ordinary and necessary.
Ordinary means that this is a common and accepted expense for the industry. Necessary means the expense is appropriate and helpful for your business or trade. Some examples of these expenses include the cost of rent, interest paid on loans, and salaries paid to your employees.
It’s important to note that personal portions of expenses aren’t deductible. This includes things such as using a business vehicle. These are general rules that apply to all small businesses, regardless of the type or entity.
20% Business Income Deduction
Based on the current tax reform, you can claim a 20% deduction on your business income if your small business reports operations on Form 1040, such as a sole proprietor who is using a Schedule C.
This is a huge benefit for business owners because it means a significant amount of the business income they earn will remain untaxed. This deduction along helps small business owners keep more of their earnings, avoid taxes on them, and reduce higher tax rates.
Home Office Deduction
Do you use part of your home to handle business activities? If so, you may be eligible to receive a home office deduction. It is important to note that the part used must be used exclusively and regularly. The deduction will be for depreciation, cleaning fees, mortgage interest, meat, and utilities based on the square footage of your home that is used for business purposes. You can claim any allowed itemized deductions, which include real estate taxes and mortgage interest, too.
There is also a simplified calculation from the IRS to figure the deduction to use your home for business purposes. It will simplify the calculation and the record-keeping requirements; however, it doesn’t change the criteria for anyone who claims this deduction. You must be using part of the home exclusively and regularly for business operations. Usually, you can figure the deduction for your home by multiplying the area used for business purposes by $5. There is a maximum of $1,500 for this deduction.
Start-Up Cost Deductions
The government has encouraged people to open new businesses by providing a $5,000 write-up for all start-up expenses. The $5,000 deduction will be reduced by the total expenses you pay that exceed $50,000. Start-up costs can’t be expensed and amortized for 15 years starting the month you open your doors.
Some of the start-up costs include the total amounts paid to create a business or trade to investigate the acquisition or creation of a business or trade. Some examples include any advertisements made when opening the business, travel, and other related costs. After you start your operations, then all business costs will be deductible.
Deductions for Retirement Plans
It is a good idea to plan for retirement early, especially with all the incentives provided by the government. You can choose from various retirement plans that allow you to save for retirement tax-free.
As you can see, there are more than a few ways to reduce your tax bill when you open and run a small business. It is good to keep this in mind to help ensure that you don’t pay more than necessary in taxes.