Five Must-Know Small Business Tax Incentives

Five Must-Know Small Business Tax Incentives

Since January this year, did you know that the SECURE Act has offered credits for implementing a 401k plan? It is an auto-enrollment feature plan where companies can receive a credit of up to $5,000. It is only one of the tax incentives you can take advantage of because there are many that you can try. 

Taxes are the bane of many small business owners, so it is no surprise that more are looking for ways to save. With the help of tax incentives, you can reduce your income taxes by taking advantage of certain deductions or credits allowed under federal law. 

Tax credits and deductions can help make your business more profitable, but it is easy to overlook them if they are not known beforehand. This blog post lists five of the most popular tax incentives for small businesses so that you can take advantage of every opportunity.

5 Tips on Small Business Tax Incentives

There are many different ways to save money on taxes, but it is essential to be aware of the tax incentives you qualify for. The five must-know small business tax incentives are: 

1) Tax Deductions for Sole Proprietorships

The sole proprietorship is a business owned by one person, and thus the tax return for this type of business is called "Schedule C." It can write off certain expenses to lower their taxes, such as vehicle expense deductions, home office deductions, entertainment/lifestyle expenses, or job search costs. 

These deductions can lower your taxable income, which in turn reduces the amount of tax you owe. However, only expenses directly related to earning business revenue are deductible. 

2) Retirement Savings Plans for Self-Employed Workers

Self-employed workers can contribute to a retirement savings plan and get tax breaks on their contributions. There are two types of plans that self-employed workers can use: 

SEP IRA

The SEP-IRA is an individual retirement account that allows you to save up to $55,000 per year. 

Solo 401k

The Solo 401k is generally more favorable for self-employed workers because you can save up to $54,000 per year if age 50 or older. You are also allowed to make catch-up contributions of an extra $6000 per year on top of your regular contribution limits. 

When it comes time to take distributions, you will pay taxes on the amount withdrawn. So, if you were in a higher tax bracket when you made the contributions, you would pay more in taxes. However, this is still better than paying taxes on the entire distribution as you would if it was a traditional IRA. 

You can also roll over your retirement savings from a previous job into one of these plans, known as a "rollover contribution." It will allow you to continue deferring taxes on the earnings and avoid required minimum distributions (RMDs). 

3) Home Office Deduction

If you use a portion of your home exclusively for business purposes, you may be able to deduct this as a home office deduction. 

The deduction is based on the percentage of your home used for business and includes mortgage interest, property taxes, insurance, repairs, and utilities. 

Qualifying for the home office deduction is not easy. It is much easier to qualify if you work exclusively from home and use your entire house for business. However, if the office space in your home is used by other family members who are frequently present in that area of the house while you are working, this will make qualifying more difficult.  

4) SEP IRA Contributions and Sole Proprietorship Profit Sharing Plan Tax Treatment

Self-employed workers can also contribute to a SEP IRA, an individual retirement account. The contribution limit for 2019 is $55,000 or 25% of your income. Whichever is less can be deducted from your taxable income. 

In addition, if you own a sole proprietorship, you can make profit-sharing contributions to your SEP IRA. These additional contributions are discretionary and can be in any amount up to 25% of your income or the regular contribution limit, whichever is lower. 

5) Lifetime Business Exclusion

Self-employed workers can also take advantage of the lifetime business exclusion, which allows you to pass your business on to your children tax-free. The lifetime business exclusion applies to any business, including sole proprietorships and S corporations. 

To qualify, the child must be younger than 24 years old and have less than $70,000 in income each year for the next five years. 

For self-employed workers with children who want to take advantage of this exclusion, consider transferring your business into an S corporation or limited liability company (LLC). Then any future earnings can be transferred to their child's personal tax return and taxed at a lower rate.

Conclusion

We have discussed five of the most popular small business tax incentives: the home office deduction, SEP IRA contributions, profit-sharing plan, lifetime business exclusion, and earned income credit. Make sure to speak with a tax professional to see which of these incentives are right for you and how best to take advantage of them