An expense that you can deduct from your taxable income is a tax deduction (or “tax write-off”). Take the cost of the expense and deduct it from your taxable income. Tax write-offs essentially allow you to pay a lower tax payment. However, the expense must meet IRS rules for a tax deduction.

Making the most of all of your tax deductions might save you hundreds, if not thousands, of dollars at tax time.

It can be tough to know which deductions apply to you as a small business owner.

You’ll need to keep correct records and remain on top of your monthly bookkeeping to claim these deductions.

Tax Changes for Small Business Owners 

  • Business use of car: If you drove for business and kept account of your mileage, you should know that the deductible mileage rate for 2021 is 56 cents per mile, down from 57.5 cents per mile in 2020.
  • Business interest: If you paid interest on a business loan, the amount of interest you can deduct has been reduced. You can deduct interest expenses up to 50% of your taxable income for the 2020 tax year. You can deduct interest expenses up to 30% of your taxable income for the 2021 tax year.
  • If your small business lost more money than it earned in 2021. You can’t take the entire net loss as a deduction any longer. Your business loss deduction is restricted to $524,000 if you’re married and filing jointly. Your business loss deduction is restricted to $262,000 if you’re single. The remaining loss must be treated as a net operating loss for the taxable year. Furthermore, due to a clarification contained in the CARES Act, any W-2 income earned outside of your business (including your spouse’s W-2 income) must be reported as taxable income, even if your firm loses money.

List of small business tax deductions

  • Advertising and promotion:

Advertising and promotion expenses are fully deductible. They qualify as long as the expenses are ordinary, reasonable, and essential.

Keynote: Costs that are largely personal, even if they have some promotional value, are not deductible.

  • Business meals:

You can deduct 50% of eligible food and beverage expenses in most cases. The spending must be an ordinary and necessary component of carrying on your business. The meal cannot be expensive or extravagant under the circumstances. The business owner or an employee must be present at the meal to qualify for the deduction.

  • Business insurance:

If you have business insurance that is both ordinary and necessary for your company’s operations, you can deduct the entire cost of the insurance. Most modern businesses are obliged to carry business insurance by state legislation, industry requirements, or contracts.

  • Bank fees:

It’s always a good idea to have separate bank accounts and credit cards for your business. Annual or monthly service charges, transfer fees, and overdraft fees charged by your bank or credit card issuer are all deductible. You can also deduct transaction or merchant costs paid to a third-party payment processor like PayPal or Stripe.

  • Business use of car:

You can deduct the expenditures of operating your vehicle for commercial purposes. The optional standard mileage rate for deducting operating a business car costs will be 56 cents per mile beginning January 1, 2021.

  • Depreciation:

Depreciation regulations force you to spread the expenses of furniture, equipment, and other business assets over the years you’ll use them rather than deducting the entire cost in one go when you buy them.

The faster tax benefit of depreciating these items upfront is more appealing. Fortunately, the IRS provides numerous options for business owners to deduct the entire amount in a single year.

  • Legal fees:

Legal fees paid by your small business are tax-deductible. This includes legal expenditures for cases you didn’t win.

The costs must be regarded as normal and necessary for the firm to operate. Fees for addressing tax concerns, fees linked to whistleblower claims, and fees related to unlawful discrimination allegations are all examples of deductions.

  • Home office expenses:

You may be able to deduct a portion of your housing expenses against your company income if you work from home. Home office expenses can be deducted in two ways. Using the simplified method, you can deduct $5 per square foot of your house that is utilized for business, up to a maximum of 300 square feet. 

Using the traditional method. Keep track of all actual maintenance costs, including mortgage interest or rent, utilities, real estate taxes, cleaning and landscaping services, homeowners association fees, and repairs. Multiply these costs by the proportion of your home that is used for business.

  • Interest:

You can deduct interest paid to your lender or credit card company if you take out a loan or use a credit card to cover business expenses and meet the following criteria: you are legally liable for the debt, both you and the lender intend for the debt to be repaid, and you and the lender have a true debtor/creditor relationship.

  • Legal and professional fees:

Fees for legal and professional services directly relevant to your business’s operation are deductible. Lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services demand fees. You can only deduct the portion of the cost relevant to the business if the fees include payments for personal work.

Nobody wants to pay taxes or cover the fees of filing taxes. Tax deductions are an important way to reduce the amount of tax you owe, and keeping solid records can ensure that you keep those deductions if the IRS comes knocking.

If you have inquiries related to this tax season, don’t hesitate to get in touch with us. 

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