Here are just a few key deductions and credits that can benefit small business taxpayers.
Qualified business income deduction. Many individuals, including owners of businesses operated through sole proprietorships, partnerships, S corporations, trusts and estates may be eligible for a qualified business income deduction, also called the section 199A deduction. Some trusts and estates may also claim the deduction directly.
The deduction allows them to deduct up to 20 percent of their qualified business income (QBI). Income earned by a C corporation or by providing services as an employee isn't eligible for the deduction.
The deduction is available for tax years beginning after Dec. 31, 2017.
Business losses. The TCJA also made changes to losses. Under TCJA, losses from a trade or business are now limited to $250,000 or $500,000 for a joint return. This includes activities reported on Schedule C by a self-employed individual. Excess business losses that are no longer allowed are treated as a net operating loss (NOL) and carried forward to the following tax year.
For most taxpayers, NOLs arising after 2017 can only be carried forward. After Dec. 31, 2017, the net operating loss deduction is limited to 80 percent of taxable income.
Business expenses. Business expenses are usually deductible if the business operates to make a profit. To be deductible, a business expense must be both 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. Business expenses include:
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.
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.
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.
Taxes – A taxpayer can deduct various federal, state, local, and foreign taxes directly attributable to their trade or business as business expenses.
General business credits. The general business credit includes about two dozen tax credits for a variety of businesses and business activities. Often, a taxpayer who qualifies for one or more of these credits but is unable to use them for a given tax year can carry them back to a prior year or forward to future years.
Employer credit for paid family and medical leave. TCJA added this new general business credit that qualified employers may claim based on wages paid to qualifying employees on family and medical leave. To claim the credit, eligible employers must 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. For TY 2018, the employee’s prior year compensation from the employer must have been $72,000 or less.
Tax credits can help employers hiring new workers. With many businesses now facing a tight job market, there is another general business credit that may help. The long-standing Work Opportunity Tax Credit (WOTC) is designed to help employers who hire long-term unemployment recipients, certain veterans, recipients of certain kinds of public assistance and other categories of workers with employment barriers.