The IRS celebrated National Small Business Week by issuing reminders and resources for the nation’s entrepreneurs. The agency closed out the week with credits and deductions that can help qualifying small businesses. And, as the IRS notes, reducing tax liability can mean healthier profit margins.
Small Business Deductions
The new qualified business income (QBI) deduction was introduced in Section 199A of the Tax Cuts and Jobs Act (TCJA). First available for TY 2018 returns, many businesses may not understand or even be familiar with QBI.
As the name suggestions, QBI is a 20 percent deduction for qualified business income, but the IRS noted that those who qualify can also deduct 20 percent from some real estate investment trust dividends and publicly traded partnership income. That said, there has been some confusion about how and when to apply QBI, which has been discussed on the Taxing Subjects Podcast.
The IRS also explained that losses are different since TCJA was implemented, imposing a $250,000 limitation on trade or business losses ($500,000 for joint returns) that affects Schedules C, F, and E. If a loss can no longer be deducted due to TCJA changes, the IRS said businesses can, “[treat them] as a net operating loss (NOL) and [carry them] forward to the following tax year.”
As for deducting business expenses, the IRS listed the following deductions:
- Business use of a home – If a taxpayer uses part of their home for business, part of their home expenses may be deductible. These expenses may include mortgage interest, insurance, utilities, repairs and depreciation. Alternatively, a simplified method is available for figuring this deduction. Special rules and limits apply. See Publication 587 for details.
- Business use of a car – If a taxpayer uses their car in their business, they can deduct car expenses. If they use it for both business and personal purposes, they must divide expenses based on actual mileage. For details, including special recordkeeping rules, see Publication 463.
- Meals and entertainment – In general, taxpayers can deduct 50 percent of the cost of business meals if the taxpayer -- or an employee of the taxpayer -- is present and the food or beverages aren’t lavish or extravagant.
- Rent expense – In general, a taxpayer can deduct rent as an expense only if the rent is for property used in their trade or business. If they have or will receive equity in or title to the property, the rent is not deductible.
- Interest – Business interest expense is an amount charged for the use of money a taxpayer borrowed for business activities. Limits and special rules may apply. See basic questions and answers about the limitation on the deduction for business interest expense for more information.
- Taxes – A taxpayer can deduct various federal, state, local, and foreign taxes directly attributable to their trade or business as business expenses.
Small Business Credits
According to the IRS, there are more than 20 general business credits for which a small business might qualify, and the Employer Credit for Paid Family and Medical Leave is a new general credit for businesses that supply those types of leave to their employees.
Businesses can claim the credit if they “have a written policy in place that meets certain requirements, including providing at least 2 weeks of paid leave to full-time employees (prorated for employees who work part time) and the paid leave must be at least 50 percent of the wages normally paid to the employee.”
Small businesses looking to hire new employees can benefit from the Work Opportunity Tax Credit (WOTC). While it may not have been introduced by TCJA, the IRS noted that WOTC provides assistance to businesses “who hire long-term unemployment recipients, certain veterans, recipients of certain kinds of public assistance, and other categories of workers with employment barriers.”