Small Business Series: Top 5 Tax Write Offs That Owners Can Leverage To Keep More Money

Small business owners in the United States face many challenges, including managing cash flow, marketing their products or services, and attracting and retaining employees. However, there are also many tax benefits that are unique to small business owners that can help them reduce their tax burden and keep more money in their pockets.

Qualified Business Income Deduction

The Qualified Business Income Deduction (QBID) is a tax deduction that was introduced in the Tax Cuts and Jobs Act of 2017. It allows small business owners to deduct up to 20% of their qualified business income from their taxable income.

This deduction is available to sole proprietors, partnerships, S corporations, and limited liability companies (LLCs). However, there are income limits and other requirements that must be met in order to take advantage of this deduction.

Home Office Deduction

Many small business owners operate their business from their home, and the Home Office Deduction allows them to deduct a portion of their home expenses, such as mortgage interest, property taxes, and utilities, as a business expense.

To qualify for this deduction, the home office must be used regularly and exclusively for business purposes. Small business owners can choose between two methods for calculating the deduction: the simplified method, which is based on the square footage of the home office, or the regular method, which requires more detailed calculations.

Section 179 Depreciation

Section 179 of the Internal Revenue Code allows small business owners to deduct the cost of certain property, such as equipment and machinery, in the year it is placed in service rather than depreciating it over several years.

The deduction limit for Section 179 changes from year to year, but in 2022, small business owners can deduct up to $1.05 million in qualified property. This deduction is available to all types of businesses, including sole proprietors, partnerships, and corporations.

Business Vehicle Deduction

Small business owners who use a vehicle for business purposes can deduct the cost of operating the vehicle, including gas, maintenance, and insurance, as a business expense. This deduction can be taken either as a standard mileage rate or as actual expenses incurred.

The standard mileage rate for 2022 is 58.5 cents per mile, and small business owners must keep detailed records of their business-related mileage in order to take advantage of this deduction.

Retirement Plan Contributions

Small business owners can also take advantage of tax benefits by contributing to a retirement plan for themselves and their employees. Contributions to a retirement plan are tax-deductible, which can help reduce the business’s taxable income.

There are several types of retirement plans available to small business owners, including SEP-IRAs, SIMPLE IRAs, and 401(k) plans. Each type of plan has different contribution limits and requirements, so it’s important to work with a financial advisor to determine the best option for the business.

In conclusion, small business owners in the United States have many tax benefits that are unique to them. By taking advantage of these deductions and credits, small business owners can reduce their tax burden and keep more money in their pockets. However, it’s important to work with a tax professional to ensure that all requirements are met and that the business is maximizing its tax benefits.

Download a copy of our 22 Tax Planning Strategies for Small Business Owners. As always, consult your CPA and legal counsel before doing anything.