Commonly Missed: Qualified Business Income Deduction (QBI)
The IRS loves incentivizing business ownership and the Internal Revenue Code is basically just chock full of ways that business owners can save money on taxes. One of the most common ways but sometimes often missed is the qualified business income deduction.
This allows you to take this qualified business income deduction if you are a business owner and who qualifies as a business owner, sole proprietor, LLC's, and S Corps. It is a 20% deduction, or a tax reduction or taxable income, for owning a business and earning self-employment income.
This is a deduction just for owning a business; there is a calculation to determine how much you get, but it is only given to you for running the business. So, if you're thinking about starting or buying a business, this could be your calling card!
Get in touch with a board-certified financial advisor at Vincere Wealth Advisor if you'd like to discuss your business strategy with a professional.
Petty Cash Expenses
Petty cash is used to pay for incidental expenses, such as parking fees or bagels for a staff meeting. To ignore them would be to miss out on potential tax breaks!
In the case of a store, you might keep some spare cash in a cash drawer for making instantaneous adjustments. Small purchases may be made with cash on hand if your company is not a retailer. It is important to monitor cash expenditures in the workplace.
If you want to use these minor costs as a tax deduction, you must keep accurate records of them. To keep track of when, where, how much, and what was purchased, start a logbook or use petty cash vouchers and have everyone sign them. All of these minor monthly expenditures should be recorded in your accounting software at month's end. Putting them all together will take you by surprise.
To the extent that you use your car for work, those costs are deductible. This includes driving for work:
- From one place of employment to another
- Patrons and clients in town for a visit
- Meetings for business purposes
- How to commute between homes and short-term workplaces when you have multiple permanent workplaces.
Both the standard deduction and actual expenses can be used to offset the cost of business travel on your tax return. It is important to keep track of all of your spending before settling on a strategy. A concurrent (at the time) log is required, and it should detail the transaction's business context.
Here are the two main justifications for keeping a log:
1. The purpose of keeping track of mileage is to demonstrate how much of your time was spent on business-related rather than leisure-related activities.
2. In order to accurately track monetary outlays.
Expenses incurred for a car used for business purposes must be documented, as must the first date of business use, individual business use mileage, and annual business use mileage. The destination and purpose of each business trip must also be documented.
Payments for Document Processing
You may have had to pay for certain papers to be prepared in order to submit a business plan or a loan application. The cost of printing and binding the documents is also deductible. Even if you don't wind up getting the money you needed for your business loan, the money you spent on a consultant, lawyer, or accountant to help you secure the loan is still deductible.
Deductible Professional Fees Do Not Include:
Transactional legal costs incurred when acquiring a company's assets (these may be able to be depreciated along with the cost of the asset)
Costs associated with private matters, such as a will being drafted. Invoices that include both business and personal items require careful parsing to ensure that only business expenses are deducted. If you hire a certified public accountant to complete your personal tax return and include a Schedule C for your business, you can expect to pay a fee. Expenses incurred in preparing a Schedule C are tax deductible, but those for a personal return are not.
Costs of Transportation and Related Items
For tax purposes, carrying charges are the fees incurred during the process of developing real estate or transporting and installing business-related personal property. It is possible that the fees and interest on a loan are included in the carrying charges.
Even though some carrying costs can be written off, the vast majority must be accounted for as an expense (depreciated over the life of the asset). Loan and bank fees (plus any applicable sales taxes) should be factored in as well. It is possible to lower your business's taxable income by deducting certain business expenses.
Finances for Studies and Experiments
For tax purposes, there are two ways to deduct money spent on research and experiments:
1. Through a write-off or gradual payment over time (like depreciation),
2. With the help of the brand-new tax credit for study.
Considering research is an activity that raises the business's overall worth, the costs associated with it are typically classified as capital expenditures. Accumulated depreciation is the spreading out of capital expenditures over a set period of time (similar to depreciation).
Investments in research and experimentation are justified when they help shed light on important questions about a product's design, manufacture, and sale. Patent application fees are not counted as research expenses.
Obtaining an Allowance for Research Expenses
Research is one activity for which a small business may be able to claim a tax credit of up to 20% of qualifying expenses. A portion of this research credit may also be applied as a payroll tax credit against the Social Security Tax that your company must pay if it meets certain requirements.
Scientific experiments designed to enhance a product or process qualify as research for this tax credit.
Expenses Associated with Establishing a New Business
It is common practice to classify as capital expenditures the costs associated with establishing and launching a business. Start-up and operating expenses are treated differently by the IRS:
The term "startup costs" refers to the initial financial outlay required to launch a new business or to research the feasibility of doing so.
The initial outlay required to form a company, be it a corporation, partnership, or limited liability company, is known as "organizational costs." Legal and professional fees, as well as business registration fees, are included in these estimates.
Start-up and initial setup expenses of up to $5,000 may be deducted in the first year of business. If your business's total start-up or organization costs are more than $50,000, you will not be able to deduct the full $5,000. All initial investment and setup expenses in excess of $5,000 will be amortized (deducted evenly over a set period of time).
Inconsistent Costs Incurred By The Company
It is easy to lose track of the small things that add up to a big bill, but it is crucial not to. Part II of Schedule C, which is used for filing taxes by sole proprietors and small businesses, contains an itemized list of all business expenses. Line 27a is the very last item on the list. As the saying goes, "Other costs." Part V enumerates these outlays; they are labeled "Other Expenses." These are regular and recurring costs that do not fit into any other category on Schedule C.
Here are a few examples of the types of miscellaneous costs that qualify for deductions:
- Website maintenance fees, hosting fees, and any other fees incurred for your business online. (You may want to factor some of these into your initial investment.)
- The cancellation of bad debts
- Financial institution costs and fees
- Dues and memberships to clubs, but only for business and industry groups.
- Charges assessed by credit card companies, such as those assessed for late payments.
- Improving one's own and one's staff's knowledge. (There are numerous restrictions and prerequisites.)
- Petty cash is used for miscellaneous expenditures (see details on this above).
- Journal subscriptions in the fields of business and technology. (Subscriptions to generic or "waiting room" magazines are not tax deductible.)
Your business might not be able to take advantage of all of the deductions previously mentioned, or a deduction might have certain requirements or restrictions. However If you think you might be able to get one or more of these tax breaks, we highly recommend speaking with a tax expert for more information.
I hope this information was helpful! If you have any questions, feel free to reach out to us here. I’d be happy to chat with you.
Vincere Tax can help you with the tax implications of business taxes, stocks, bonds, ETFs, cryptocurrency, rental property income, and other investments.
Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!
Friends don’t let friends do their own taxes. Share this article!
This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this article.