Tax tips 2024: Small business deductions you should know

Tax season is in full swing. That means many small business owners are looking for ways to reduce their tax burdens. After all, the United States tax code is complex, and you can alleviate a significant portion of your small business’ tax obligation if you navigate it properly. 

Lumin recently had the opportunity to speak with entrepreneur John N. Wood, Esq., managing attorney at Grant Park Legal Advisors in Chicago, a firm that helps small businesses navigate the complexities of the U.S. tax code.

Wood pointed out a couple of things small business owners can do to reduce their tax burdens significantly. 

Take advantage of startup cost deductions

Wood points out that small business owners should start with general startup cost deductions.

“Some of the basic startup expenses a business can write off include legal and incorporation fees, marketing, advertising, research expenses, technology and software, insurance premiums for business insurance and professional fees of accountants and consultants,” he says.  

However, he warns these expenses can only be taken if the business is actually started; you can’t deduct expenses from a business that isn’t active. Though you should keep track of your expenses prior to opening your business as you may be able to deduct them retroactively. There are also, he says, limits on these deductions.

What are these limits? IRS publications 334 and 583 (A Tax Guide for Small Businesses and Starting a Business and Keeping Records, respectively) are great references. 334 outlines the basics for business accounting – including potential credits and deductions – while 583 outlines startup-specific opportunities to save on your taxes: 

• you can deduct up to $10,000 of your business startup costs. However, if your total startup costs are over $60,000, this deduction is reduced by the amount those costs exceed the $60,000 cap. So, if your total startup cost is $62,500, you’ll only be able to deduct $7,500. 
• you can also deduct up to $5,000 of your organizational costs. However, if your total organizational costs exceed $50,000, this deduction is reduced by the amount your costs exceed the $50,000 cap. So, if your organizational costs are $51,000, you’ll only be able to deduct $4,000. 

Take advantage of the Qualified Business Income Deduction (QBI)

“Beyond the normal deductions for startup costs and the expenses for running your business,” Wood says, “the Qualified Business Income Deduction (QBI) (a potential deduction of 20% of income from qualified businesses like S-corps and limited liability corporations) is probably one of the most important deductions for those small businesses that are a pass-through entity.” 

A pass-through entity is an entity through which the business’s tax liability passes through to its owners. Wood describes these as “those business structures such as Sole Proprietorships, Partnerships, S-Corps, and LLCs, where the income passes through and is taxed on a personal return.”

So, which business structure should you choose? That usually depends on the ownership structure of your business. If you have several shareholders, an S-Corp may be your better option since this business structure gives you the ability to pass income - and therefore tax liability - on to your shareholders. 

Nonetheless, Wood says the QBI is more effective for those who aren’t in the fields of law, health, consulting and financial services. That’s because in these fields, the QBI deduction is phased out completely at relatively low caps ($364,200 for joint filers in 2023 and $383,900 in 2024). 

However, in other fields the QBI deduction is bigger. It is:

• the greater of 50% of your share of W-2 wages paid out in the business
• or 25% of your share of the W2 wages paid out in the business, plus 2.5% of qualified property used in the business

In terms of “qualified property,” Wood says, “think equipment or machinery.”

The bottom line

Hopefully your bottom line is well in the green. It’ll get this way from deducting standard business expenses, but there are more deductions to be had.

You could consider deducting your startup costs that were incurred prior to opening your business as well as the QBI deduction to expand your tax savings this year.