Business expense deductions help small business owners lower their taxable income in 2021.
A 2018 survey by Clutch found that 30% of business owners believe they are overpaying their taxes. This means that there’s a lot of business expense deductions being left on the table during tax time. To help you reduce your taxable income, we’ve put together a list of business expense deductions. We hope this list will help you trim your taxable income as a business in 2021.
What is a tax deduction?
Tax deductions lower your taxable income, which means you pay less in taxes. As your taxable income gets lower, so will your tax bill. Unfortunately, many small business owners leave thousands of dollars on the table each year. This is often because they don’t have the time to determine which tax deductions they can use as part of their tax strategy.
Business Travel Expenses
If you travel for business, the costs you have while on your trip might count as a deductible business expense. The Internal Revenue Service (IRS) allows you to deduct expenses that you incur while on business-related travel, including transportation and hotel costs. Gas costs for your daily commute to work is not tax-deductible. This is because you choose your home’s location and its distance from your workplace.
When you do decide to deduct business travel expenses, make sure your trip meets the following requirements:
- The trip must keep you away from your home or office for longer than one typical workday
- Sleep and rest are required on your trip to meet the demands of your occupation
Here is a list of deductible expenses you can deduct while on a business trip:
- Dry cleaning (related to your business)
- Parking fees
- Toll fees
- Vehicle costs while on a business trip
- Costs related to business phone calls
Travel expenses for military reservists
If an Armed Forces member travels over 100 miles away from home while on reserve-related business, they can deduct their travel expenses.
As a military reservist, you are able to deduct the following expenses, provided they are not reimbursed:
This business expense deduction is limited to the amount set by the federal government for its employees while they’re on business trips.
Business Meals Expenses
Along with travel and hotel expenses, you can also deduct 50% of business-related meal expenses. However, these business expense deductions must meet the following requirements:
- The expense is ordinary and necessary to your business operations.
- The meal must not be unusually lavish or extravagant.
- An employee or the owner must be present at the meal.
As with all tax deductions, keep the receipts and other documentation that verifies your meal expenses were indeed business-related.
Home Office Expense Deductions
In most companies, the remote work arrangements introduced during the coronavirus pandemic are still on. Gallup released findings in May that showed 7 out of 10 professionals are working from home.
If you’re working from a home office, you might be able to deduct office expenses as tax deductions. To qualify for this business tax deduction, your home office must be a specific area of your home that is solely designated your work.
Also, you can only deduct expenses that are directly related to your home office, not for personal use.
Examples of deductible home office costs
For example, lawn care expenses might be deductible if your house is your workplace and your lawn’s appearance impacts your business. Meeting clients in your home office is a scenario that might qualify your lawn care expenses as tax-deductible.
You can calculate deductible expenses for your home office in one of two ways, the simplified method and the standard method.
The simplified method involves deducting $5 per square foot of the area that is used for business, with a limit of 300 square feet.
The standard method involves tracking all of your home expenses. This includes costs like utilities, rent, and home repairs. Then, you multiply these costs by the percentage of your home that is used for business purposes.
Be sure to consider software subscriptions as you’re calculating your business tax-deductible expenses.
When using home office costs as tax deductions, keep any receipts that show you purchased the supplies for work purposes.
Home Office Furniture Expenses
Along with your home office space and supplies, you can also deduct furniture costs related to your home office. You can either deduct furniture costs over seven years or as a full-cost deduction in one tax year.
For a full-cost deduction, there are several ways to do those, including:
- Safe harbor: If a piece of furniture costs under $2,500, you can expense the item within the year that it’s bought.
- Section 179 deduction: You can use this deduction to deduct assets valued up to $1 million that you started to use that year
- Bonus depreciation: You can deduct the full cost for assets like appliances, furniture, and similar assets using bonus depreciation.
Business Expense Deductions For Your Vehicle
If you use your car for business purposes, you might be able to add this to your list of tax-deductible expenses. You can either use the standard mileage rate or write off your actual expenses. This second method requires diligent record-keeping of miles travelled throughout the year, but it can be worth it.
You can also deduct the operating and maintenance costs for your vehicle that are related to its use for business purposes.
2020 State Income Tax Refund
If you took the standard deduction in 2019, the income tax refund you received in 2020 was not considered taxable income. On the other hand, if you itemized your deductions, the refund you received in 2020 is considered federally taxable.
In many cases, your 2020 tax refund will be considered tax-free if you were within the alternative minimum tax (AMT) limits for 2019. Your tax refund may also be considered tax-free if your 2019 deduction pushed you over the standard deduction threshold.
It’s important that you take care to report the correct amounts. The Form 1099-G shows the entire refund amount, all of which may not be taxable.
If you owed state income tax for 2019 and paid it in 2020, you can add that payment to your 2020 state tax deduction. Remember to consider the $10,000 limit for state and local taxes.
Net Operating Loss (NOL) Carry-back
The 2020 CARES Act provides for a 5-year carryback period in which you can use your net operating loss for tax purposes. Starting with the oldest of the five years, prior returns are amended until the full amount of the loss has been accounted for.
PPP Loan Expenses
Included within the tax relief bill of December 2020 is a provision related to costs paid for with proceeds from forgiven PPP loans. You can claim business expense deductions on the tax schedule for costs covered using forgiven PPP loan funds. However, while this is true at the federal level, you must check your state tax requirements
Pass-through businesses are small business owners of entities like S-corporation, partnership or LLCs. Within a pass-through business, owners report profit as their own income and file their taxes according to their individual tax rate.
Prior to the Tax Cuts & Job Act, all income for a pass-through business owner would be taxed according to their personal income tax rates. But, starting January 1, 2018, pass-through business owners can not deduct 20% of eligible profits. The pass-through deduction threshold is $157,500 for individual taxpayers and $315,000 for married couples.
Qualified income for the business pass-through deductions includes income from:
- Sole proprietorship
- Rented real estate
- Real estate investment trusts (REIT)
- Publicly traded partnerships
Insurance Premiums (Sole Prop)
If you’re a solopreneur and paying your own insurance premiums, you might be able to include the premium cost in your business expense deductions. However, this deductible expense is limited to your net income amount. Additionally, you cannot have participated in an employer-sponsored health plan.
Social Security (Sole Prop Business Expense Deduction)
When you own your own business, you’re responsible for paying all the business taxes. These business taxes include those that would normally be paid by the employer like Social Security.
However, you can deduct 50% of the amount paid toward Social Security on your 1040 tax return form.
Economic Impact Payments (EIP)
If you received an economic impact payment, you should also have received Notice 1444, which records the payments you received. It’s important that store this document with your W-2 forms, 1099s, and other tax documents. Those that qualified but did not receive the proper amount can claim the difference as a tax credit on their 2020 tax return.
Charity Volunteer Tax Breaks
If you volunteer for a charity, nonprofit, or government entity, you may qualify for several tax deductions. No tax deduction is permitted for the value of services performed for charities or nonprofits. However, the travel, lodging, and meal costs incurred can be counted as business expense deductions.
Legal & Professional Fees
Most business owners retain attorneys, accountants, and other professionals to help them make critical business decisions. You can deduct these expenses on your tax return. However, the professional must be retained for business use, not personal use.
Wrapping It Up
The key to maximizing business tax deductions is organization. You must make sure your records are organized and that your expenses are carefully documented. In the event of an IRS audit, diligent record keeping will help you justify expenses and tax deductions. If you need help with taxes, bookkeeping, or accounting, call our office today! We’d love to help you!