Which business tax deductions is your small business eligible for??
This is a BattlePlan Virtual, tax based research, content marketing and “how-to” sample. For this article I researched all current business tax deductions for the 2021 tax year and created a simple guide to make it more easily consumable for a financial newsletter client.
Dear Reader, my expertise is content research, content writing and marketing. I am not a tax advisor. You can certainly use this information as a well researched guide but DO check with your tax advisor.
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The following is a comprehensive list of possible deductions you can take, IF you qualify and just in time for filing your 2021 taxes. Also a GREAT reference!
* = Important Caveat
Business Meals
Business meals for employees, clients, and potential clients can be tax deductible, depending on the purpose of the meal. To be eligible, meal costs must be considered reasonable. *Exorbitant prices for extravagant meals won’t qualify as a deductible business expense.
Business Insurance
The cost of business insurance is 100% deductible if the insurance is considered both ordinary and necessary for your company’s operation. The business insurance policy must benefit the business and serve a business purpose.
Business Interest
If you take out a loan for business purposes (including a mortgage on business real estate) or obtain a line of credit for business purchases, the interest you pay is tax deductible. There is a limit on this, however, AND it has changed for the 2021 tax year. The interest expense deduction has gone down from 50% of your taxable income to *30% of your taxable income.
Special considerations:
Interest that must be capitalized does not qualify as tax-deductible. This includes any interest added to a principal balance of a business loan or mortgage. Capitalized interest should be assessed and depreciated along with other costs.
Advertising and Marketing
The costs for advertising, marketing and promotion of your small business are fully tax deductible. As long as the expenses are considered ordinary, reasonable, and necessary, they qualify. This includes any marketing or advertising expenses spent on campaigns to generate or retain customers.
Business use of car
If you use your vehicle for business purposes, you can deduct the associated costs. As of January 1, 2021, the optional standard mileage rate used to deduct the costs of operating a business vehicle is 56 cents per mile. If you want to deduct vehicle expenses, you’ll need meticulous records.
*Vehicles used as equipment, such as dump trucks, and vehicles used for hire, such as taxis and airport shuttle vans, do not qualify.
Education
The costs to provide qualifying educational benefits for yourself or your employees can be deducted. Tax-deductible education expenses include continuing education and courses for professional licenses. Deductible education costs must add value to the business and increase the workforce’s expertise and skills. *You can’t deduct educational expenses that qualify you or an employee for a different trade.
Depreciation
Depreciation is the gradual decrease in the value of a company’s assets. Depreciation enables you to allocate the cost of fixed and tangible assets over time. Bonus depreciation enables you to claim a larger portion of depreciation on assets purchased within the tax year. With bonus depreciation, up to 100% of an asset’s cost can be deducted, as long as, the asset is business qualified.
Legal Fees
Legal fees paid by your small business qualify as tax deductible, *even if you didn’t win the case.
Moving Expenses
If you moved your business in 2021, you can deduct your moving expenses. This includes the costs associated with transporting business equipment, supplies, and inventory. Personal moving expenses are exempt, although there are some exceptions for military members.
Rent
If you rent office space, a warehouse, or another type of business property for business purposes, this may provide you with a deduction. *However, if you have or will eventually receive equity in or title to the property in question, rent expenses are not deductible. For a home office, you may be eligible to write off a portion of the cost.
Salaries and Benefits
As a small-business owner with one or more employees, you can deduct the cost of the employees’ salaries, benefits, and vacation pay. This includes regular wages, commission, and bonuses. *The employee must not be the sole proprietor, a partner, or an LLC member.
There are cases when the IRS will consider a deduction unreasonable, for example, if the employee is an investor or a personal acquaintance.
Phone and Internet Expenses
Phone and internet use costs for small business can be deducted. Phone and internet usage must be essential to the business’s operation. If the work phone and internet are also used for personal purposes, only the percentage of the cost that represents business use can be deducted.
Travel Expenses
Travel to meet a client, to attend a conference, or for any other business-related reason, *out of your state, can be deducted. Be certain to save documentation that proves your trip was for business.
Home Office
If you use a home office, you may be able to deduct the costs of creating and maintaining your workspace. The calculation is based on what percentage of your home is used for business. To find this percentage, divide the square footage of your office by the total square footage of your home.
You have two primary options for the home office deduction: simplified and standard. Of course, the simplified option is easier, but could result in a smaller tax break. The standard option requires a bit more math and exacting record keeping but could get you a larger deduction. Also, be aware that the IRS is now looking much more closely at home office deductions.
Office Supplies/Expenses
The necessary supplies for running and maintaining a functional office are fully tax deductible. *The 3 key IRS rules you have to follow for an office supply to be tax deductible are: DO NOT keep a record of when the supplies are used, DO NOT take inventory of the supplies and these deductions must not significantly alter your business’ final income.
Startup Expenses
If you launched your small business in 2021, you can deduct up to $5,000 in startup expenses. A start-up cost is deductible if it’s a cost you would normally deduct when operating an existing business but it’s a cost you incurred before the day your business began.
Business Bad Debt
When someone owes your business money and you can’t collect it, this is business bad debt. Bad debts happen if you sell a good or service to a customer with the understanding that they’ll pay you on credit and your business ends up not getting paid. Business bad debts can be fully worthless or partially worthless. Worth is based on the chance the amount owed will be paid or if your business collected some but not all of the debt.
Business Casualty Losses
This deduction applies if your business suffers theft or physical damage. To be eligible for this deduction you must be the owner of the property, and the loss must be the result of a sudden, unpredictable event.
Charitable Donations
If your business makes charitable donations you can deduct the entire amount contributed. *The donation must be cash and it must benefit a qualifying entity.
If your business is set up as a sole proprietorship, LLC, or partnership, you should claim charitable donations on your personal taxes. If your business is an S-corporation, you should claim charitable donations on your corporate tax return.
Investment Interest
Interest capitalized on money your small business borrows with the intention of making investments can be deductible. Deductible investment interest strictly applies to interest you have accrued on money borrowed to produce future investment income. This includes interest, dividends, annuities, and royalties that you would expect to appreciate in value. You can’t deduct more in investment interest than you’ve earned in investment income.
Foreign Earned Income Exclusion
U.S. citizens owning a small business in another country, under certain circumstances, can exclude their foreign income from their U.S. business tax return. Essentially, the foreign earned income exclusion prevents you from getting taxed twice.
Retirement
Small business owners are responsible for funding their own retirement plan. The contributions are tax deductible.
Contract Labor
If you paid a freelancer or independent contractor to work for your small business in 2021 you can deduct their fees as a business expense.
Note: If you pay a contractor $600 or more during the tax year, you’re required to send them a Form 1099-NEC by January 31 of the following year. They’ll need this when they’re doing their taxes.
Employee and client gifts
If you give employees gifts, you can deduct the costs of these gifts, with limitations. Be certain to keep records that prove the business purpose of the gift and show the amount spent. You can deduct 100%, up to $25 per person. The gift item should be tangible, not entertainment.
The professionals at Terri Bell and Associates are experienced and nationally certified. They are here to help YOU with ALL of the above because, THAT IS WHAT THEY DO!!
