2020 Income Tax Deductions, Exceptions and More For Business
The one major drawback of being a small business owner, however, is taxes. If you work for someone else in a standard 8 to 5 job, your employer typically takes care of your taxes. When you own a business, you’re responsible for your own taxes. The good news is that there are many resources and professionals that can help make the process of filing your own taxes a bit easier.
2020 Came Fast
Many employees find that their days go by slowly. This is particularly true if they have a job that they don’t particularly enjoy. Business owners, on the other hand, often report that time flies.
If you’re a business owner, you know just how easily time can get away from you. You likely have a long list of daily responsibilities and wish that there was more time to complete them.
If you were busy in 2019, it may be hard for you to believe that it’s already 2020. Since you’ll have to pay taxes on your 2020 income before you know it, it’s a good idea to familiarize yourself with the 2020 income tax deductions and exceptions. So, what exactly are deductions?
Tax deductions reduce your taxable income. They allow you to claim certain expenses on your taxes. By understanding the deductions and exemptions that apply to you, you can save you a great deal of money and headaches when it comes time to file your taxes.
Regarding Life Insurance Tax Deductions
Most likely, you have a life insurance policy to protect your business or your loved ones in the event you pass away. If you do have life insurance, you may be wondering whether you can deduct it from your taxes.
Unfortunately, the answer to this very common question isn’t cut and dry. It really depends on who you are (an individual, self-employed contractor, or business owner) and what the life insurance policy is being used for. Let’s explore this question further below.
1. As An Individual
Life insurance is an important investment if you’re an individual, especially if you have a family. It can protect your family’s finances if tragedy strikes and you’re no longer there to provide for them. If you’re the sole or primary provider for your family, it’s essential.
Since your life insurance is considered a personal expense, it isn’t tax-deductible. The IRS views your life insurance premiums the same way it looks you buying a car, clothes, or anything else. Also, there’s no law that states you must purchase life insurance so the government doesn’t see a reason to offer you a tax break for it.
2. When Self Employed
If you’re a freelancer, contractor, or another self-employed individual, you may also invest in life insurance to protect your family financially upon your death. Since you may be able to deduct health insurance premiums, you may believe that you can deduct life insurance premiums as well.
Unfortunately, this isn’t the case. The IRS doesn’t allow you to deduct health insurance premiums as someone whose self-employed. It’s not something that you’re required to buy and they consider it a personal expense. Look at the bright side: besides health insurance premiums, you may also deduct part of your house, education, car, and retirement savings.
3. When Owning A Business
If you’re a business owner, the premiums you pay for life insurance to protect your family aren’t deductible. This holds true even if you use your business checking account to pay them. However, there are a few exceptions.
If your life insurance policy is intended to protect your business assets, the premiums are tax deductible. You may also deduct the premiums if you purchase life insurance for your employees as they’re considered operational expenses. So, the purpose of your life insurance will dictate whether or not it can give you a tax break.
Special Tax Situations For LLCs
As a Limited Liability Company (LLC), you’re taxed as a partnership (more than one owner) or a sole proprietor (single owner). This is the case unless you elect to be taxed as a Corporation. Fortunately, you may be eligible for the qualified business income deduction in 2020.
If your total taxable income is under $163,300 as a single filer or $326,600 as a joint filer, this deduction will save you up to 20 percent on your taxes. It’s important to note that capital gains and losses, dividends, interest income, and income earned outside of the U.S. are excluded from these figures.
In the event your taxable income exceeds these limits, you may still qualify for this deduction. The nature of your business will determine whether or not you do. If you claim the standard deduction, you may be wondering whether the qualified business income deduction still applies to you. Yes, you can still use it even if you don’t itemize deductions.
Speaking of standard deduction, the amounts have slightly increased from the 2019 tax year. In 2020, the standard deduction is: $12,400 for single filers, $24,800 for people that are married filing jointly, and $18,650 for head of households.
Special Tax Situations For S-Corps
When it comes to self-employment taxes, you get special treatment if you’re an S-corporation. Even if you’re the owner of the S-corp, you can treat yourself as an employee. This means you can pay yourself a reasonable salary.
The salary should be comparable to what others in your industry who offer the same products or services are earning. Your 15.3 percent self-employment taxes are withheld and paid on your salary amount.
Once you pay yourself a salary and take care of your self-employment taxes, the remaining income you earn isn’t subject to self-employment taxes. This means you can save a great deal of money on taxes and keep more of your profits in your bank account.
Let’s say you’re an S-corp owner and pay yourself a salary of $60,000. You’ll only pay the 15.3 percent self-employment tax on the $60,000. If your total earnings are $200,000, you won’t be responsible for self-employment tax on the remaining $140,000. You’ll just pay the regular federal income tax, that will depend on your bracket on the $140,000.
As an S-corp, you may also be eligible for the qualified business income deduction that we discussed in the LLC section.
Special Tax Situations For Nonprofits
Since nonprofit organizations strive to offer a community service, rather than operate a traditional business, there are special tax laws designed for them. To allow them to focus their funds on their missions and goals, the IRS gives them tax-exempt status. So, if you’re the owner nonprofit, you don’t need to claim any tax deductions because your earnings won’t be taxed.
What you do have to pay, however, is income tax as well as other income deductions like Medicare withholdings. Even if you take a lower pay than you would if you worked for a for-profit organization, you don’t qualify for any work-related tax deductions. There are a few exceptions to this.
If your nonprofit doesn’t have the funds to take care of your health insurance or retirement plan, you may deduct these expenses if you pay for them out-of-pocket. Also, if you make donations to your nonprofit, a deduction may be possible as well.
Due to the fact that the IRS often looks for tax abuse from those in the nonprofit sector, it’s important to be very careful when you you claim deductions and file your taxes.
Wrapping Things Up
With so many tax rules and scenarios out there, it can be tough to figure out what small business deductions you qualify for. Therefore, it’s in your best interest to consult a tax professional. They can look at the ins and out of your tax situation and make recommendations to lower your tax burden.
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Frequently Asked Questions
Can I deduct life insurance premiums on my taxes?
In most cases, the answer is no. However, if life insurance is purchased for your employees or to protect your business, it may be deducted.
What is the qualified business income deduction in 2020?
If you’re a sole proprietorship, partnership, S-corp, or LLC, you may be eligible for the qualified business income deduction. In 2020, it can save you up to 20 percent on your taxes if your total taxable income is under $163,300 as a single filer or $326,600 as a joint filer.
Do I qualify for deductions as a non-profit owner?
Since your earnings won’t be taxed, you don’t have to claim any small business tax deductions. There are however, a few income deductions you may qualify for if you pay for your own benefits or donate to the organization.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.