Bigger isn’t always better. Some tax benefits that aren’t available to larger businesses may be available to your small business. Here are some examples of tax deductions for small businesses.
QBI deduction
The qualifying business income (QBI) deduction is available to eligible individuals, trusts, and estates from 2018 through 2025. However, C companies and their stockholders are not eligible.
The maximum QBI deduction is 20 percent of:
• QBI earned from a sole proprietorship or a single-member LLC treated as a sole proprietorship for federal income tax purposes, plus
• QBI passed through from a pass-through business entity, such as an S corporation or LLC that is treated as a partnership for federal income tax purposes.
Tax items are reported by pass-through business entities to their owners, who subsequently include them in their owner-level returns. The QBI deduction regulations are complex, and at higher income levels, the deduction may phase out completely.
Cash-method accounting
Annual taxable income can be adjusted by businesses that are qualified to utilize the cash method of accounting for tax purposes. This is done by strategically choosing the year you claim your deductions and recognize your taxable income.
When using the cash method, you typically wait until you get paid in cash before recognizing any taxable income. Additionally, deductible costs that are paid in cash or by credit card are often deductible.
The cash technique is perhaps only available to “small” businesses. According to current legislation, a small business is one that, based on the previous three tax years, has average annual gross receipts of no more than $25 million. This cap is adjusted each year to account for inflation. The cap is $27 million for tax years starting in 2022.
Section 179 deduction
You could be able to deduct part (or all) of your qualifying asset acquisitions in the first year they are put to use thanks to the Section 179 first-year depreciation deduction. It is available for both new and used real estate.
The deduction criteria are significantly more favorable than under the previous law for qualifying property placed in service in tax years 2018 and after. Improvements include:
Higher deduction. The Sec. 179 deduction has been permanently increased to $1 million with annual inflation adjustments. The maximum for qualifying assets put into operation in 2022 is $1.08 million.
Liberalized phase-out. The amount that triggers the phase-out of the maximum Sec. 179 deduction is $2.5 million with yearly inflation adjustments. The phase-out starts at $2.7 million for qualifying assets placed in operation in 2022.
The phase-out rule applies only if you add more assets than what is allowed as a deduction for the year. Your maximum deduction is decreased dollar-for-dollar by the excess if they exceed the limit. Additional restrictions apply to Sec. 179 deductions.
Bonus depreciation
First-year bonus depreciation deductions are not subject to any restrictions that may apply to Sec. 179 deductions. First-year bonus depreciation is available at 100 percent for qualifying assets put into service in 2022. For qualifying assets placed in service in 2023, the first-year bonus depreciation percentages are scheduled to decrease to 80%. They will continue to decrease until they reach 0% for 2028 and later.
Contact one of our team members to find out if you’re utilizing all eligible tax deductions for your small business.
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