Taxes can be one of the most complicated parts of being a business owner, and the array of new changes that came out in the new tax reform bill in 2017 has seemingly complicated matters further for business owners. On one hand, there are exciting new incentives that entrepreneurial folks didn’t have access to beforehand, such as greater first-year depreciation levels (more on this below). On the other hand, the new tax bill eliminated several tax write offs that employees and employers alike would’ve preferred to keep, such as the deductions for job interview-related travel and entertainment deductions.
Whether you’re a brand new business owner or a seasoned entrepreneur who’s still struggling to fully understand the new, post-2017 tax reality from a business perspective, here are some surprising tax write offs (new and old) that new business owners might not be aware of yet.
First-Year “Bonus” Depreciation
A key benefit of the 2017 tax bill for business owners is the ability to write off 100% of qualified property acquired and used in business operations between September 2017 and January 2023. Previously, this “bonus” depreciation percentage was just 50%. The IRS says this “applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify.”
QBI stands for “Qualified Business Income Deduction,” which allows an owner of a sole proprietorship, partnership, or S-corporation to deduct up to 20% of their qualified business income in Section 199A on their taxes. They can further deduct up to 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income.
There are several exclusions to the QBI deduction listed on the IRS website, but it’s nevertheless an enormously useful tax benefit for business owners that arose from the 2017 tax bill. Best of all, the QBI deduction is available to eligible business owners regardless of whether they itemized their other deductions or took a standard deduction for a particular tax year.
Standard Mileage Rates
Mileage rates aren’t a new or particularly surprising tax benefit, but the IRS did change its standard mileage rates for 2020 and not in the direction you might be expecting (rates actually decreased for the most part):
- 57.5 cents per mile for business miles driven (down from 58 cents in 2019)
- 17 cents per mile driven for medical or moving purposes (down from 20 cents in 2019)
- 14 cents per mile driven in service of nonprofit organizations (unchanged from 2019)
If you hire any 1099 gig workers to help you with an aspect of your business – anything from graphic design and marketing to accounting and legal services – then you can deduct your payments to these individuals from your business taxes as well. Under IRS regulations, these folks are considered self-employed, independent contractors, which means they’re responsible for handling their own federal taxes, FICA, etc.
Unless you’re eligible for health insurance through an employer-sponsored plan (e.g., your day job or spouse’s job), then you could write off the costs of your health insurance plan (personal & family) from your business taxes. This also applies to any/all employees’ health insurance costs covered by your company.
Dining & Entertainment
The 2017 tax bill ended 50% deductions for business entertainment expenses (e.g., taking a client out for a round of golf). However, you may still deduct 50% for meals at business functions (excluding alcohol, which is considered entertainment).
Recap: Don’t Miss These Unexpected Tax Write Offs
Even if you have an accountant or top-of-the-line tax software, figuring out which tax credits and deductions you qualify for can be enormously challenging for newer business owners (especially after the major changes unveiled in the 2017 Tax Cuts and Jobs Act). Figuring out business taxes in a post-2017 world necessitates that business owners maintain extremely thorough records of all income and outflow of cash to ensure no stone is left unturned for tax deduction time.
You can further maximize your tax efficiency by speaking with a qualified financial professional (accountant or financial planner) to assess whether you are claiming too many or too few deductions, since you don’t want to risk leaving tax credits on the table but you also don’t want to risk an audit, either.
As long as you’re smart about your business spending, maintain excellent records, and thoroughly review and understand the main tax credits and deductions available to you, preparing taxes as a small business owner should be significantly easier than if you wing it and wait until next spring to figure out the mess of receipts, invoices and other paperwork in your office.