Medium-sized and small businesses are always concerned about standard deductions such as supplies and rent. However, there are lesser-known costs one can leverage to get a more considerable refund debt.
The lesser your tax liability, the higher chances you have to excel in business. You can get to that by writing off some business operation expenses legally. In a moment, we will discuss prominent small business tax deductions for 2020 and 2021 to help in future planning.
What do you understand by a Tax Deduction?
A tax deduction is also termed as a tax write-off. It’s merely an expense that can be deducted from the income you are taxed on. You just have to subtract the expense amount from your taxable earnings. In short, tax deductions lessen the tax burden for small business owners. All the same, the deductible expense must meet IRS conditions for a tax deduction.
Below is an extensive list of tax deductions available to small business;
Salaries and wages
Payment to workers includes bonuses, commissions bonuses, salaries, wages, plus taxable fringe benefits. These are deductible expenses for businesses.
However, payments made to LLC members, partners, and sole proprietors aren’t wages. That’s saying that they don’t fall under the category of deductible business expenses as the owners are not workers. Nevertheless, in an S corporation or C corporation, the owner can be titled as a worker and even get a salary, but that is if the owner is carrying out primary roles.
Most small business owners rely on independent contractors and freelancers to provide labor. Such contract labor cost is deductible. But you must give Form 1099-MISC to the contractor who is getting $600 or even more from you. If the contractor is paid through PayPal or credit card, the processor will decide whether to give Form 1099-K to the Independent contractors. Furthermore, for personal protection, you may choose to send your 1099-MISC.
The cost of small business items such as cleaning supplies is deductible expenses. Besides, if you opt for de minimis safe harbor, that will allow you to cut on the cost of such items as vacuum cleaners and tablets instead of depreciating. Such things are categorized as non-incidental materials/ supplies.
Sometimes, it’s possible to write off the entire cost for business items you bought in the tax year you purchased them. This also covers Section 179 deduction- it permits you to cut the full cost of items bought up to a set dollar limit which was $1,040,000 in 2020. There are other limits linked to section 179 deductions.
Also, there is a bonus depreciation allowance. This bonus allows you to write off 100% of the cost incurred on computers, furniture, appliances, equipment, and machinery.
Advertising and promotion
Marketing cost is 100% deductible. This covers things such as;
· Hiring an expert to design your business logo
· Printing business brochures and cards
· Sending cards to your customers
· Creating a new website
· Sponsoring an event
· Buying ad space in print/ online media, among others
Nevertheless, it’s not possible to subtract amounts that have been paid for legislation purposes or money paid to sponsor political events.
You can subtract 50 percent of qualifying beverage and food costs. Furthermore, you can subtract 50 % of the cost incurred in feeding your workers, such as purchasing pizza for supper when your employees work late. Business meals provided at office picnics or parties can be written-off 100%.
Be sure to document such occasions and include the amount incurred on each expense, place of the meal, day, and the business relationship of the people who ate the dinner. At the back of the receipt, you can also highlight what you discussed.
Did you know the amount paid for business insurance is deductible? It includes the following;
· Assets coverage (equipment, buildings, and furniture)
· Liability coverage
· Malpractice insurance or professional liability
· Auto insurance for company’s vehicles
· Group health, vision, and dental insurance for workers and so on.
It’s an excellent idea to have separate credit cards and bank accounts. In case your credit card company or bank charges monthly or annual service charges, overdraft fees, or transfer fees, all these can be deducted. Besides, you can write off third-party payment processor fees such as Stripe or Paypal.
Note that you cannot write your credit cards or personal bank accounts.
Education costs are 100% deductible, provided they are essential for your business. However, the IRS must evaluate your education cost to decide whether it qualifies. Therefore, it will check whether education helps to sharpen the skills needed in your business. Some qualifying business education expenses include the following;
· Webinars and seminars
· Books related to your industry
· Classes to sharpen business skills
· Transport cost incurred when going to class
· Workshops for increasing expertise
To read more on topics like this, check out the Business category