Farwah Jafri | June 11 2021
Starting a business is a big feat for many entrepreneurs, but keeping the ball rolling is a much bigger challenge. Besides other pain points, the ongoing and one-off expenses are a big downside of running your business. From paying for rent and utilities to bearing payroll and other administrative expenses, a small business has to budget for a number of overhead costs.
However, did you know that there is some relief for small business owners to soften the blow of the extra costs? That’s right – some of your business expenses might be tax-deductible allowing you to save money and grow your profits.
Feeling confused over which deductions you may be eligible for? No wonder, taxes are hard nuts to crack especially for the small business filers.
Let us guide you through a checklist of small business tax deductions for 2021.
A small business tax deduction is an expense as qualified by IRS, that can be written off or subtracted from your taxable income. The purpose of tax deductions is to allow you to pay a smaller tax bill.
As per IRS criteria, to be deductible, business expenses must be:-
• Ordinary (common in your industry or trade, such as advertising & marketing)
• Necessary (essential to run the business, such as supplies), and
• For business, not personal purposes.
The following requirements must be met by a small business to qualify for a tax break:
• The gross annual income of the business must be less than $20 million in the relevant tax period.
• The business must be conducted as a sole proprietorship using Schedule C, C corporations, S corporations, partnerships, and limited liability companies (LLC).
There is a long small business tax deductions checklist for 2021 that you may be eligible for however, which ones qualify as the right ones is what you need to figure out. Explore our checklist of small business tax deductions that will surely guide you well when filing your 2020 taxes. Having said that, make sure you consult a CPA or other tax professional before filing your returns to avoid any costly errors.
The small business tax deductions checklist below applies to most small businesses regardless of their business structure.
A new business venture launched in the current tax year can be written off up to $5,000 in startup expenses. The expenses include marketing costs, travel costs, training costs, the depreciated cost of vehicles or equipment.
Business owners who have designated a part of their home solely to work and business operations may be able to yield a deduction for the expenses based on how much square feet out of the total area of the home is used for office space. The deductible expenses include both, the direct expenses, such as designated phone lines, paint jobs, and long-distance call costs, and indirect expenses, like utility bills, general repairs, and homeowner’s insurance.
An important item of the small business tax deductions checklist is the office supplies used in the current tax year for running and maintaining office functions. This may include deductions for printers and ink cartridges, cleaning services and supplies, work-related computer software, disposable kitchenware, stationery items, and the likes.
IRS, however, follows three key rules that determine whether or not an office supply qualifies as tax-deductible:
• The taxpayer must not maintain a record of when the supplies are used.
• The taxpayer must not take inventory of the supplies.
• Deducting these items must not twist the business’s final income.
Business owners that rent a building, office space, warehouse, parking garage or other types of business property can enjoy tax deduction on rent expenses.
Small business owners with employees can deduct their workers’ salaries, benefits, commissions and bonuses, and vacation pay from their business tax returns. However, as per the eligibility criteria, the employee(s) must not be the sole proprietor, a partner, or an LLC member, and the salaries and benefits must have been paid in the year in which the taxpayer claims the deduction.
Expenses of the internet and phone services used for business operations also find their way in the small business tax deduction checklist. This also includes in-flight internet purchases.
Business meals with clients, office meals for employees, meal expenses while traveling are deductible only up to 50% whereas meals and entertainment expenses for company-wide party are 100% deductible.
The costs associated with business vehicles including cars, SUVs, and pickup trucks that are used for business activities can be written off 100%. This includes registration fees and taxes, fuel costs, maintenance and repairs, licenses, vehicle insurance, rental or lease payments, tolls and parking fees.
If the car is being used for both business and personal purposes, actual mileage should be taken into account for splitting the costs accordingly.
All the business travel to a destination away from the business owner’s resident state qualify for full tax deduction. This not only includes airplane, train, or bus ticket expenses, but also the costs associated with parking and toll fees, taxis, meals and lodging, verified through documentation. Vacation expenses are not included in the small business tax deductions checklist.
Any marketing or advertising expenses spent on campaigns to generate or retain customers are fully tax-deductible. This includes costs of producing advertising materials such as business cards, flyers, etc. and electronic and print advertising costs.
Due to state laws and industry regulations, the vast majority of companies are required to insure their businesses. Such insurances like general liability insurance, workers’ compensation insurance, data breach insurance, commercial real estate insurance, professional liability insurance can be completely deducted from your taxes if it is considered both ordinary and necessary to your company’s operation.
Interest on loans taken out for business purposes, such as investment, purchases or interest on credit card may qualify for small business tax deductions checklist for 100% tax break.
However, interest added to a principal balance of a business loan or mortgage in order to be capitalized does not qualify as tax-deductible. Rather, it should be assessed and depreciated along with other costs of the business asset.
Also included in the small business tax deductions checklist is education. Small businesses that provide educational opportunities to their employees to increase their expertise and skills may get a 100% tax break for the associated costs. So, all the expenses of continuing education, courses, workshops, and the relevant seminars and webinars are tax-deductible.
However, if the courses are provided to meet the minimum education requirement, or for a different trade, then associated expenses of such education will not qualify for tax deduction.
Taxpayers can get tax written-off on assets they own and purchase for income-generating operations of the business. The asset must have an estimated useful life expectancy. Considering the wear and tear and age of the assets such as machinery, equipment, office furniture, computers, business vehicles whose determinable life span has exceeded one year, the business owners can assess the value of those over the time and claim for their depreciation.
Legal and professional fees including the fees for resolving tax issues, whistleblower claims, and unlawful discrimination claims which are ordinary and necessary for the business are fully deductible, irrespective of the outcome of the case, i.e. whether the taxpayer wins or loses.
The small business tax deductions checklist also includes bad business debt, business casualty losses, charitable donations, investment interests and retirement plans.
This small business tax deductions checklist will come in handy while preparing for your taxes. Isn’t it a relief to know that you may owe less in taxes if you play your cards right? You may use this checklist of small business tax deductions not only to prepare your tax returns but also to run projections about possible tax breaks.
We understand that tax season is tough and it is not easy at all to get a hang of the nitty-gritty details involved in tax deductions. Tax experts at Monily can prepare you for this; saving you time, money and giving you complete peace of mind.
Note: This small business tax deductions checklist is for information purposes only and should not be relied upon as a substitute for legal or tax advice. State and local laws related to taxation may be modified or changed at any given time. Readers are advised to verify updates and the latest developments in the small business tax deductions checklist before filing.
Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.