Tax Tips for Small Businesses: Deductions
Business owners should review options and eligibility for tax deductions now to better estimate their tax situation and plan ahead. The key deductions that will be reviewed are the qualified business income deduction, business losses, and business expenses.
Qualified Business Deduction:
The qualified business income deduction (“QBI”) allows eligible owners of pass-through entities (sole-proprietorships, partnerships, S-corporations, trusts, and estates) to deduct 20% of their qualified business income. The deduction will allow for a 20% deduction of qualified business income, plus 20% of qualified real estate investment trust (“REIT”) dividends and qualified publicly traded partnership (“PTP”) income. Income earned by a C-corporation or as an employee will not be eligible for the deduction.
Under the new TCJA the rules regarding business losses have changed. Losses from a trade or business are now limited to $250,000 or $500,000 for joint returns. This includes activities reported on Schedule C by a self-employed individual and farming activities reported on Schedule F. It also includes being an employee and certain activities reported on Schedule E. Rules for pre-2018 net operating losses (“NOLs”) remain the same. After December 31, 2017, the NOL deduction is limited to 80% of taxable income.
In order for a business expense to be deductible, it must be ordinary and necessary. An ordinary expense is one that’s common and accepted in the trade or business. A necessary expense is one that’s helpful and appropriate for the trade or business. An expense doesn’t have to be indispensable to be considered necessary. Some common business expenses include: business use of a car, business use of a home, meals, rent expenses, interest, and various tax deductions (including federal, state, local, and foreign taxes directly attributable to their trade or business as business expenses). For more information on business expenses see IRS publication 535, Business Expenses.