Deductible business expenses help small- and mid-sized furniture retailers with many of the costs of running a company. Business owners know that most expenditures can be written off, although there may be limits and timing issues. So, what are the most common tax deductions for small businesses?
Last fall the IRS released data on sole proprietorship returns. The same types of deductions can be claimed by other entities—C corporations, S corporations, partnerships, and limited liability companies (LLCs) (although there may be slightly different rules for some deductions).
See which ones might apply to your 2018 tax return and start gathering documentation for purposes of estimating taxes and business planning.
Here is a roundup of the most common tax deductions that were claimed on Schedule C of Form 1040 by sole proprietors (including independent contractors and one-member limited liability companies not reporting elsewhere) as determined by the dollar amounts, starting with the largest category.
*Caution. Before taking any of the deductions, it’s important that you consult with your tax advisor for more detailed information on requirements for taking the deduction for your business. You can also get more information on most deductions at IRS.gov, but regulations and instructions for some of the significant tax code changes enacted in December of 2017 may not be available until later this year.
Top 20 Tax Deductions for Small Businesses
1. Car and truck expenses
Most furniture retailers use a vehicle, such as a car, light truck or van. The cost of operating the vehicle for business is deductible only if there are required records to prove business usage. In deducting costs, the need to keep records of cost (e.g., gasoline, oil changes) is eliminated if you rely on the IRS standard mileage rate of 54.5 cents per mile in 2018 instead of deducting your actual outlays. You can use the standard mileage rate whether you own or lease the vehicle.
2. Salaries and wages
Payments to employees, including salaries, wages, bonuses, commissions, and taxable fringe benefits, are deductible business expenses for the business. (For employee benefit programs, such as retirement plan contributions, see the full list online.) Of course, payments to sole proprietors, partners, and LLC members are not wages (i.e., they are not deductible business expenses) because these owners aren’t employees. The new Section 199A 20 percent adjustment to taxable income from pass-through businesses will also require documentation of wages paid if the taxpayer’s joint Adjusted Gross Income exceeds $315,000.
3. Contract labor
Many small businesses use freelancers or independent contractors to meet their labor needs. The cost of such contract labor is deductible. Be sure to issue Form 1099-MISC to any such contractor receiving $600 or more from you in the year (if payment is made to the contractor via credit card or PayPal, it’s up to the processor to issue them Form 1099-K, but you should send your own 1099-MISC for personal protection).
The cost of items used in a business (e.g., dollies and blankets in a warehouse) as well as postage are fully deductible business expenses. Also, if you elect to use a de minimis safe harbor allowing you to deduct the cost of tangible property (e.g., tablets, vacuum cleaners) up to $2,500 for most small businesses, rather than depreciating, the items are treated as non-incidental materials and supplies. They are deductible business expenses when purchased or furnished to customers, whichever is later.
This deduction is an allowance for the cost of buying property for your business. It includes the Section 179 deduction for equipment purchases up to a dollar limit ($510,000 in 2017; $1 million in this year). Certain other limits also apply. The depreciation category also includes a bonus depreciation allowance, which is another type of write-off in the year costs are paid or incurred. The limit is 50 percent for property acquired and placed in service through September 26, 2017, and 100 percent for property acquired and placed in service after September 27, 2017.
6. Rent on business property
If you don’t own the building where your store resides, the cost of renting it is fully deductible.
Electricity for your facility is fully deductible. Other utility costs include your mobile phone charges. If you take a lot of work home with you and claim a home office deduction, the cost of the first landline to your home is not deductible. If you have a second line, it is a deductible utility cost.
You can deduct licenses, regulatory fees and taxes on real estate and personal property. Your employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes, are fully deductible business expenses. However, for self-employed business owners, the deduction for half of your self-employment tax is not a business deduction; it is an adjustment to gross income on your personal income tax return. And owners of pass-through entities cannot treat their state and local income taxes on business income as a business write-off. These are personal taxes deductible only on Schedule A of Form 1040 (and for 2018 through 2025, are subject to a $10,000 cap for all state and local taxes).
The costs of your business owner’s policy, malpractice coverage, flood insurance, cyber liability coverage, and business continuation insurance are all fully deductible. However, there are two rules to note for health coverage. A small business may qualify to claim a tax credit for up to 50 percent of the premiums paid for employees (a better tax break than a deduction). Also, the cost of health coverage for self-employed individuals and more-than-2 percent of S corporation shareholders is not a business deduction. Instead, the premiums are deducted on the owner’s personal tax return.
The cost of ordinary repairs and maintenance are fully deductible, while costs that add to the property’s value are usually capitalized and recovered through depreciation. However, there are various safe harbor rules that allow for an immediate deduction in any event.
11. Commissions and fees
They are fully deductible and may require you to report them on Form 1099-MISC (see item #3). However, commissions paid in connection with buying realty are not deductible; they are added to the basis of the property and usually are recovered through depreciation.
Heading to High Point or Las Vegas? Maybe to Minneapolis for the HFA’s Insights conference? If you or staff members travel out of town on business, the cost of transportation (e.g., airfare) and lodging is fully deductible. You must meet substantiation requirements explained in IRS Publication 463 to claim any travel deduction. Heading to work every morning? Sorry, local commuting costs usually are nondeductible.
Ordinary advertising costs are fully deductible.
14. Home office
Since some retailers use their home for business, you should know a portion of personal expenses of a home are only deductible as a business expense if the home is used regularly and exclusively as the principal place of business, a place to meet or deal with clients or customers, or as a separate structure used in the business. The deduction includes both direct costs (e.g., painting a home office) and indirect costs (e.g., the percentage of rent or mortgage interest and real estate taxes that reflect the percentage of business use of the residence). There is also a simplified safe harbor deduction available, but it still must meet the above requirements.
15. Legal and professional fees
Legal and accounting fees for the business are fully deductible.
16. Meals and entertainment
Qualified meal costs are deductible business expenses only up to 50 percent although there are some meal costs that are fully deductible. Thus, a business lunch is half on you and half on Uncle Sam. And the deduction can only be claimed if you substantiate the expense (see IRS Publication 463). Starting in 2018, no deduction can be claimed for entertainment costs. Meal expenses (e.g., costs incurred while traveling away on business) remain 50 percent deductible.
17. Rent on machinery and equipment
Fees paid to lease or rent items such as a forklift in the warehouse or a printer in the office are fully deductible.
18. Interest on business indebtedness
Interest on loans that the business takes usually is fully deductible as a business expense (e.g., interest on a line of credit used in a construction business). However, starting in 2018, businesses with average annual gross receipts in the three prior years of more than $25 million are limited in the percentage of interest that’s deductible. And interest on loans by owners to buy their businesses are treated differently. Distinguish business interest from an owner’s investment interest or passive activity interest, which is not a business deduction. For example, an individual who takes a personal loan to buy shares in an S corporation must allocate the debt proceeds to the business assets. If the assets are all used in the business, then the owner’s interest is deductible business interest. If some assets are investments, then a portion of the interest is investment interest, which is a personal deduction limited to the extent of net investment income. If some assets relate to a passive activity, such as rental realty, the allocable interest is passive activity interest subject to the passive activity loss limitation.
19. Employee benefit programs and qualified retirement plans
The cost of non-discriminatory employee benefit programs, such as education assistance and dependent care assistance, as well as contributions to employees’ qualified retirement plan accounts, are deductible. For self-employed individuals, contributions to their own qualified retirement plan accounts are personal deductions claimed on Form 1040.
20. Mortgage interest
Businesses that own realty can fully deduct mortgage interest. Unlike interest on a personal residence, there is no cap on the size of loans on which interest can be claimed.