Tax season has been quite different in 2021 compared to previous years. Due to circumstances in 2020, the IRS has extended the deadline for filing and paying taxes to May 17 for individuals – including sole proprietors and sole proprietorships, small businesses. However, the questions that arise during tax time remain, and one of the most common is, “How can I maximize my return?”
For those with small businesses, reducing taxable income and saving on the amount of money that must be remitted to the IRS is of equal concern. It’s possible to further reduce your tax bill if you know where to look. Tax deductions are one way to achieve this goal.
Tax deductions give a business or individual the opportunity to reduce their tax liability when tax day arrives. This tax liability is reduced by reducing taxable income – the gross income that the government deems subject to tax. Tax deductions are a way to reduce this taxable income. Tax deductions are subtracted from taxable income, reducing taxes owed.
Standard deductions and itemized deductions
There are two types of tax deductions: Standard deductions and itemized deductions. Registrants have the choice between these two options. You cannot choose both.
This is the easiest option for individuals claiming deductions. The standard deduction is an amount set automatically based on an individual’s filing status: Married Filing Jointly, Married, or Single. Each state has its own standard deductions, but the IRS automatically sets federal standard deductions for 2020 taxes to be filed in 2021:
- $12,400 for single taxpayers
- $12,400 for married taxpayers filing separately
- $18,650 for heads of families
- $24,800 for married taxpayers filing jointly
- $24,800 for eligible widows or widowers
Itemized deductions are generally more of a concern for small business owners. No receipt is required with the standard deduction since it is a fixed amount based on the status of the deposit. However, those with a slew of annual expenses, like small business owners, may find better opportunities to save money with itemized deductions — if you can back up the claims you make.
It’s important to note that small business owners can still claim the standard deduction on 1040 personal returns while writing off business expenses on a Schedule C form. There are many great tax deductions for 2021, but let’s look at some of the small business ones.
Tax deductions for small businesses
Due to, our way of working has radically changed. Thousands of employees have switched to remote work; others have taken the opportunity to start their own small home-based businesses. Home offices have become a necessity.
Home office deductions can provide small tax relief for small business owners. Most don’t know that their mortgage or rent, the cost of utilities, the cost of home repairs, and property taxes can all impact tax savings. According to IRS Publication 587, a percentage of the square footage of your home, the portion used for business-related activities, may be tax deductible.
Under the IRS’ new simplified guidelines for home office expenses, small business owners who work in home offices can deduct $5 per square foot of the portion of their home used to do business. The maximum area allowed for a deduction is 300 square feet.
Even certain home office supplies and expenses, such as shipping, postage, work-related computers and software, can be deducted as long as they were used for business purposes during the employment. given year. But be sure to keep all documents and receipts of purchases.
Not working from a home office? It’s good too. According to IRS publication 535, if you rent a business location, you can deduct the rental payments as a business expense. Rent is any money you pay for the use of property that you don’t own. This expense can only be deducted if it is used for your business or trade and you do not receive the equity in the property.
Do you have ad spend related to your small business? If so, most of these expenses can also be deducted. According to the IRS, you can deduct goodwill advertising expenses that are directly related to your business activities. However, no advertising used to influence legislation (lobbying) can be inferred.
Certain travel expenses may also be deductible from your taxes as long as they relate to your business. However, the trip should be considered a business trip. According to IRS Publication 463, travel expenses are ordinary and necessary expenses for traveling away from your home for business purposes. Ordinary means it is common or accepted in your business or trade, necessary means it is useful or appropriate for your particular business.
The tax household refers to the city or region in which you carry out your activities. Travel expenses generally require a location further away than a normal day’s work – a location that requires rest or sleep during the commute to get there.
According to the IRS, approved business travel expenses that can be deducted may include:
- Transportation: Travel costs between your home and the professional destination by plane, train, bus or car.
- Travel fares: An example of fares includes expenses such as taxi fares (for example, the expenses you incurred to get from the airport to your hotel).
- Vehicle costs: This includes expenses related to the use and maintenance of your vehicle during your business trips. You have the option of deducting actual expenses or using the standard IRS mileage rate. Tolls and parking may also be included.
- Meal: Meals would include amounts spent on food and drink if it is necessary to stop during the trip. Generally, there is a 50% limit on unreimbursed meal expenses, actual expenses or a standard meal allowance method can be used.
- Accommodation: Accommodation can also be deducted, assuming it is necessary for your business trip; a night is necessary or long enough to require rest.
- Other expenses: Business communication expenses, such as business calls, faxes and computer rental costs may also be deducted. Cleaning costs, such as dry cleaning and laundry, can even be deducted as business expenses.
It is essential to keep detailed records of these expenses, such as dates, business trip details (clients met) and a mileage record (if you used your own vehicle).
Similar to charitable donations used in individual and itemized deductions, charitable donations can also be deducted for your small business. Cash payments to any charitable organization can be deducted as a business expense, assuming the donations are not directly related to your business.
Education costs related to training, maintaining or improving skills relevant to your existing business may be deducted. This does not include associated education costs or moving to another profession or a new line of business or hobby that you may enjoy.
A small business owner in real estate who is taking a course to improve their real estate market analysis skills is eligible, a small business owner who is taking a scuba diving course for fun is not. To find? Of course, you must be able to prove that this particular training actually maintains or improves your skills within your company or that it is in fact required (for example, obtaining a license).
This is also true for any education expenses associated with employee training. These expenses can also be deducted.
Now, good news for new small business owners: the IRS states that a small business can deduct up to $5,000 in start-up costs in the first year of operation. These start-up costs include expenses such as travel costs to meet new clients or investors, advertising and market research, as well as professional fees such as accounting or legal fees. Of course, professional fees are deductible at all times for business owners.
Many credit card companies charge business owners a convenience fee when they sign up. These costs, when paid or incurred, can be deducted as a business expense.
Maximize your return
For many individuals and small business owners, tax preparation services and tax professionals are ready to help explain and explore the ocean of tax deductions offered by the IRS in 2021.
The tax deductions listed only scratch the surface when it comes to the number of potential tax deductions available to small businesses. But they are among the best. From start-up costs to tuition, there’s something available to benefit any small business this tax season.