7 Small Business Tax Deductions You Should Know About

Data from the U.S. Bureau of Labor Statistics shows that about 20% of small businesses fail within the first year and nearly half fail by the end of their fifth year. There are nearly 32 million small businesses in the United States that employ more than 60 million people, making businesses’ success not only important for the individual business owner, for but the livelihoods of millions of Americans.

[ Read: The Best Small Business Loans ]

Tax deductions can go a long way toward helping a business survive those first few chaotic years. Before revealing some of the best tax deductions for small businesses, it’s important to understand the difference between a tax deduction and a tax credit. Also, depending on the type of business you have, some tax deductions may be more beneficial than others, and knowing which ones to focus on can help your business grow and thrive.

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    Wait, what’s the difference between a tax deduction and a tax credit?

    The two ideas achieve similar results but in different ways. A tax deduction lowers a businesses’ taxable income while a tax credit reduces the amount a business owes. Think of it this way: A $500 tax credit issued to a business means that business lowered its tax bill by $500. A tax deduction for that same business has the potential to drop a business into a lower tax bracket.

    “Deductions are subtracted from income to determine net income,” explains Core Group CEO Christian Brim. “Net income, depending on the type of entity, is then used to calculate the tax owed. A tax credit reduces the actual tax liability.”

    7 small business deductions you should know about

    There are many deductions available, but not all of them will apply to you and your business. Each deduction has its own limitations and specific requirements. Be sure to talk to a tax professional or reach out to your local chapter of the Small Business Administration (SBA) to find out more information and to determine the best tax opportunities for your business.

    1. General business tax credit

    These series of credits and mostly industry-specific, which means not all of them can be utilized by your particular business. These credits are often meant to spur businesses to conduct research or invest in cleaner technologies. General business tax credits can often be carried forward several years and, in certain situations, can be carried back.

    2. Interest on business loans

    If you’re a small business owner, chances are you’ve had to take out a loan. This financial burden does come with a perk. The interest you pay on that loan is tax-deductible, but you need to meet certain criteria. The loan needs to originate from a financial institution like a bank, and not from a friend or family member. You must also show the intention to pay off the loan. The amount of interest you can deduct will depend on the type of loan you have.

    [ Read: What to Do If Your Small Business Isn’t Insured for COVID-19 ]

    3. Credit for small employer health insurance premiums

    The Small Business Health Care Tax Credit is a potential boon for small businesses. To qualify, you must be enrolled in a Small Business Health Options Program and have fewer than 25 full-time employees. The average employee salary needs to be around $50,000 a year or less, and you need to pay at least half of your full-time employees’ premiums. If you qualify, you could receive a credit for up to 50% of those premiums.

    4. Tax Cuts and Jobs Act

    Passed in 2017, the Tax Cuts and Jobs Act (TCJA) did many things for businesses, both big and small.

    “The TCJA was the most sweeping tax reform in 30 years,” says Brim. “Highlights include lowering both individual and corporate tax rates, capping of state and local tax deductions, increasing of the standard deduction for individuals and the introduction of the qualified business income deduction.”

    5. Qualified business income (QBI)

    Small businesses are often set up as pass-through entities, meaning the tax burden falls on the individual. The Tax Cuts and Jobs Act created a new deduction for those who earn income through pass-through entities. Qualifying individuals are now able to deduct up to 20% of their business income.

    [ Read: Small Business Guide to Home Tax Deductions ]

    6. Work opportunity credit

    This credit is an initiative by the federal government to provide opportunities to those who have historically run into barriers when seeking employment. This group includes veterans and the formerly incarcerated. Small business owners can receive up to $9,600 in credits for each new hire covered by this program.

    7. New markets credit

    Like the work opportunity credit, the new markets credit is meant to encourage access to marginalized individuals and communities. The credit encourages small businesses to open in low-income communities. These communities get jobs and access to goods and services. Small business owners receive a tax credit that is applied to their federal income tax.

    “The new markets credit allows qualified community development entities to receive a credit of up to 6% of equity contributed for seven years,” said Brim.

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Eric Wilson Edge

    Contributing Writer

    Eric Wilson-Edge is a freelance journalist who has covered personal finance, banking, the economy and other topics for The Simple Dollar, The Seattle Times, Narratively and elsewhere.

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    • Andrea Perez
      Andrea Perez
      Personal Finance Editor

      Andrea Perez is an editor at The Simple Dollar who leads our news and opinion coverage. She specializes in financial policy, banking, and investing.