Running a small business can be challenging enough without the added stress of tax season. However, taking advantage of tax breaks can help small businesses save money and improve their bottom line. From deductions for home-based businesses to credits for hiring veterans, there are several tax benefits available to small business owners. Understanding these tax breaks and how to utilize them can be crucial for success.
So, what tax breaks do small businesses get? Let’s take a closer look.
Home Office Deduction
For small business owners who work from home, the home office deduction can be a valuable tax break. This deduction allows business owners to deduct a portion of their home expenses, such as rent, mortgage interest, utilities, and insurance, that are attributable to their home office. To qualify for this deduction, the home office must be the primary place of business or used exclusively for business purposes.
It’s important to note that the home office deduction is subject to certain limitations and requirements. The IRS has strict guidelines for what qualifies as a home office, so it’s essential to consult with a tax professional to ensure that you’re eligible for this deduction.
Section 179 Deduction
The Section 179 deduction is another valuable tax break for small businesses. This deduction allows businesses to deduct the full cost of qualifying equipment and software purchases in the year they are placed in service rather than depreciating the cost over several years. This can be a significant benefit for small businesses that need to purchase equipment, such as computers, vehicles, or office furniture.
However, it’s important to note that there are limits to the amount a business can deduct under Section 179. For 2020, the maximum deduction is $1,040,000, and the deduction begins to phase out if a business purchases more than $2,590,000 in qualifying equipment and software.
Small Business Health Care Tax Credit
The Small Business Health Care Tax Credit is a tax credit that helps small businesses provide health insurance to their employees. To be eligible for this credit, businesses must have fewer than 25 full-time equivalent employees, pay average annual wages of less than $50,000, and contribute at least 50% of the employee-only premium for a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace.
The credit is worth up to 50% of the employer’s contribution toward employee premiums for two consecutive years. However, the credit is subject to certain limitations and is phased out for businesses with more than ten full-time equivalent employees or with average annual wages above $25,000.
Employee Retirement Plans
Small businesses can also take advantage of tax breaks for offering employee retirement plans, such as 401(k) plans or Simplified Employee Pension (SEP) plans. These plans allow businesses to deduct contributions made on behalf of employees, which can provide significant tax savings.
For example, businesses can deduct up to 25% of eligible employees’ compensation, up to a maximum of $57,000, for contributions to a SEP plan. Additionally, businesses can deduct contributions to 401(k) plans up to certain limits, which can vary depending on the plan.
As a small business owner, it’s essential to take advantage of tax breaks to maximize your savings and improve your bottom line. The tax breaks discussed above are just a few of the many available to small businesses. By understanding these tax breaks and working with a tax professional, you can ensure that you’re making the most of your tax deductions and credits.
Remember, every dollar saved on taxes is a dollar that can be reinvested in your business, so don’t overlook the importance of tax planning and preparation.