Small Business Deductions
May 15, 2019
IR-2019-93, May 10, 2019
WASHINGTON — During Small Business Week, the Internal Revenue Service reminds small business owners and self-employed individuals to take deductions and credits that will help their bottom line.
This year, National Small Business Week is May 5-11. For more than 50 years, the week has recognized the important contributions of America’s entrepreneurs and small business owners.
Reviewing options and eligibility now can help business owners better estimate their tax situation and plan ahead. 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), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. 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. Eligible taxpayers can claim it for the first time on their 2018 federal income tax returns filed in 2019.
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 and farming activities reported on Schedule F. It also includes being an employee and certain activities reported on Schedule E. 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. However, certain farming businesses and insurance companies – other than life insurance – can still use a two-year carryback for certain losses. After Dec. 31, 2017, the net operating loss deduction is limited to 80 percent of taxable income. Rules for existing or pre-2018 NOLs remain the same.
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. An expense doesn’t have to be indispensable to be considered necessary. 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. 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.
Publication 535, Business Expenses, has more information about these and other deductible business expenses, including employee related expenses such as employees’ pay, retirement plans and insurance.
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. See Form 3800 and its instructions for details.
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. See Notice 2018-71 and instructions for Form 8994for details.
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. Certification requirements and other special rules apply. To find out more, visit IRS.gov/wotc.
Find more information about business tax credits on IRS.gov.
Publication 5318, Tax Reform: What's New for Your Business — English (PDF) | Spanish (PDF)
Tax Cuts and Jobs Act: A comparison for businesses
FS-2019-3, IRS highlights tax reform changes that affect businesses
FS-2018-19, What’s new for farmers in 2018?
FS-2018-17, The Highlights of Tax Reform for Businesses