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What business tax deductions can my small business claim in Virginia?

At Lipsey and Associates, our phone rings daily with questions from small and midsized business owners asking whether specific expenses may qualify as a tax deduction – and for a good reason. 

Claiming appropriate tax deductions is an essential aspect of managing a small business’ finances and maximizing profit. 

However, every once in a while, we see an instance of an overly aggressive list of deductions, or the work of a DIYer earn the attention of the Internal Revenue Service. Not good. 

If you run a small business in Virginia, there are many potential tax deductions that your business might be able to claim. Here are some of the most common and important ones.

Home Office Deduction

One of the most useful tax deductions for home-based businesses is the home office deduction. If you’re able to qualify for this deduction, you can deduct a proportionate amount of your mortgage or rent expenses on your business taxes.

For example, assume you maintain a home office that’s 10 percent of your house’s total square footage and you pay $1,200 a month in qualifying housing costs. This would net you a $120 per month deduction — or a $1,440 annual deduction — for your home office.

With housing costs so high in Northern Virginia, this is an especially helpful deduction for home-based business owners in this part of the state. In order to claim a home office, though, the office can only be used for work. Home office/play space and home office/bedroom combinations don’t count.

Mileage Deduction

Whenever a vehicle is driven for work-related purposes, the miles that are driven on account of business can be deducted. This deduction is unfortunately mileage-based, which might not be a great calculation when you’re stuck on the Beltway for 3 hours, but it still amounts to a sizeable deduction if you drive for work.

The mileage deduction is calculated via either of two methods. The standard mileage rate method multiples the miles driven by the rate set by the IRS for that year. 2020’s rate is 57.5 cents per mile. The actual expense method requires keeping track of all your driving expenses, but then you can deduct all of those expenses even if they exceed the standard rate.

Importantly, the deduction can be taken whether you drive a personal or commercial vehicle for work. If you drive a personal vehicle, however, you need to keep especially accurate records that show what was driven for work and what was driven for personal use. An accountant can help set a record-keeping system up.

Capital Expense Depreciation

If you make a capital investment in equipment or other physical assets, your investment can be depreciated as a deduction on your business’ taxes. This is an especially generous deduction, because the tax law allows for a 100 percent depreciation of up to $1 million in capital expenditures in the year when the equipment is made. Few small businesses in Virginia will exceed that level of investment.

Education for Your Business

One of the best investments a small business owner can make is in themselves, and education that directly helps your business is generally a tax-deductible expense. Classes, seminars, webinars, books, workshops and more materials can all qualify as long as they’re connected to what you do.

Of course, there is some gray area with some educational courses and materials. If you’re unsure whether a particular education expense’s association with your work is close enough to claim the deduction, a certified public accountant can help you decide.

Bonus Depreciation vs Section 179
Businesses in Virginia must be mindful on which depreciation method to use if they want to take advantage of the IRS’s advanced depreciated methods. Virginia does not recognize Bonus Depreciation and will require you to add back any Bonus Depreciation taken on the federal return that wouldn’t normally be allowed under the MACRS tables. Virginia does recognize the IRS advanced depreciation methodology under Section 179 and will not require you to add back the Section 179 depreciation unless that amount is over $25,000.

Because Bonus Depreciation is taxed more favorably upon disposal than Section 179, most tax software defaults to Bonus Depreciation and most individuals do not know to decipher the difference on their state return. We can. This is why by default we choose Section 179 over Bonus for small businesses to get the maximum benefit now. How much? Virginia’s top tax rate is 6%–which means its a current tax savings of $1500 on Virginia taxes alone just by that one switch.

Get Help with Small Business Taxes

If you need help filing taxes for a small business in Virginia, contact the team at Lipsey and Associates. Our team will carefully review your business’ situation, and we’ll help you get every deduction for which your business qualifies for.