5 Critical Tax Deductions for Small Business Owners

For small business owners, maximizing deductions is crucial for reducing taxable income. Many entrepreneurs overlook legitimate write-offs simply because they aren't aware of the specific rules. Here are five critical deductions that Highpoint Zone CPA Firm ensures its clients never miss.

1. Qualified Business Income (QBI) Deduction (Section 199A)

This deduction allows owners of certain pass-through entities (such as Sole Proprietorships, Partnerships, S Corporations, and some LLCs) to deduct up to 20% of their qualified business income (QBI). It’s one of the largest deductions created by the Tax Cuts and Jobs Act (TCJA).

• The deduction is subject to various phase-outs and limitations based on taxable income, W-2 wages paid, and the unadjusted basis of qualified property.
• It is essential to determine if your business is a Specified Service Trade or Business (SSTB), which can affect eligibility.

2. Section 179 and Bonus Depreciation for Equipment

Instead of depreciating the cost of business equipment over several years, Section 179 allows you to deduct the entire cost of qualified property (such as machinery, computer software, and vehicles) in the year it is placed in service. Similarly, Bonus Depreciation allows for an immediate deduction of a large percentage (often 100%) of the cost of eligible property.

• Section 179 Limit: Has an annual dollar limit that is adjusted for inflation.
• Bonus Depreciation: Can be applied to both new and used property and is especially helpful for large capital expenditures.

3. The Home Office Deduction

If you use a portion of your home exclusively and regularly for your business, you can deduct expenses related to that space. This includes a portion of utilities, insurance, property taxes, and mortgage interest.

• Exclusive and Regular Use: The space must be used solely for business purposes, not dual personal use.
• Simplified Option: You can choose to deduct $5 per square foot of the home used for business, up to 300 square feet (maximum $1,500).

4. Self-Employed Health Insurance Premiums

Self-employed individuals who pay for their own health insurance premiums (including medical, dental, and qualified long-term care insurance) can deduct these premiums, provided they were not eligible to participate in an employer-sponsored health plan.

• This is an "above-the-line" deduction, meaning it reduces your Adjusted Gross Income (AGI) and is claimed on Form 1040, not as an itemized deduction.

5. Business Meals

While most entertainment expenses are no longer deductible, the rules for business meals have changed favorably. You can now deduct 100% of the cost of business meals purchased from a restaurant, provided the expense is incurred after December 31, 2020, and before January 1, 2023 (or subsequent extensions). After this period, the general deduction reverts to 50%.

• The meal must be ordinary and necessary, and you must be present.
• Proper documentation, including the receipt, amount, date, location, and business purpose, is essential.