The Tax Deductions Every Small Business Owner Should Know About
Welcome to Selfmade Finance School, our new money series with Block Advisors to help small business owners with their tax, bookkeeping, and payroll needs year-round. This week, we dive into the tax deductions that can help save you money when you file your taxes.
Who doesn't love a good tax deduction, amiright? As a small business owner, you should LOVE them, but oftentimes small business owners who try to navigate their own tax journey can overlook expenses that are tax deductible. It is fairly easy to identify your obvious business expenses (payroll, rent, printer paper) as tax deductions, but there are some less obvious deductions I want to highlight for you. Also, one of the best ways to identify more deductions is to ensure that you have a smart, savvy tax preparer who can uncover all the deductions for you. When hiring a tax professional, make sure you ask if they have experience working with other small businesses in your industry. Some will specialize in specific industries, so ask your network who they use.
Or, to make it easy on yourself, reach out to Block Advisors. Block Advisors small business certified tax pros have experience helping small businesses in a wide range of industries, from real estate and development to salons and consulting. And chances are good they've helped a business just like yours.
Below I will outline different types of deductions that may not be on your radar:
Arnel Hasanovic for Unsplash
Home Office: We all have a home office now, don't we? If you're an employee of a company, this deduction is no longer available to you. But to the self-employed small business owner, this deduction can be quite valuable! Let's clarify this deduction. First, the home office deduction applies to taxpayers who use part of their home exclusively and regularly for trade or business purposes. "Regular use" means that the location is your main place of business, like where you meet clients or customers during the course of a business day. "Exclusive use" means that there can be NO personal use of the space at any time during the tax year. For example, my home office is my bedroom. I could not claim my home office as a deduction, nor would I try to meet clients here. That would be weird. How much is this deduction worth? You'll take the square footage of the space as a percentage of the total home. Then, multiply that percentage times your home expenses: rent or mortgage interest, utilities, insurance, etc. It can really add up! There are other rules and options with this deduction, so I highly recommend speaking to a tax professional before you claim this as a deduction.
Business Use of Your Vehicle: Again, if you're an employee, this deduction is not available to you. But if you're self-employed, this one can be huge. To deduct the business use of your car, there are two methods: the standard mileage rate and the actual expense method. With the standard mileage rate, you'll track your business miles driven, then multiply by a cents-per-mile amount to arrive at the tax deduction. That's 56 cents per mile for 2021.
With the actual expense method, you'll track your business miles as a portion of your total mileage for the year. Then, you multiply that business-use percentage times all of your vehicle costs like gas, oil changes, repairs, and insurance.
"Notice that with either method, you MUST track the miles driven for business – it's not enough just to keep your gas receipts," says Marcie Rahn, Enrolled Agent and Master Tax Advisor at Block Advisors. "There is no vehicle use deduction without a mileage log. And the IRS doesn't just want to know the miles driven, but also the date and business purpose of the trip. So, keep good records throughout the year. You'll make yourself crazy trying to reconstruct your mileage history at the end of the year! There are some great apps out there to help you track your driving with a simple swipe."
Katie Harp for Unsplash
Health Insurance and Out-of-Pocket Healthcare Expenses: If you are self-employed, you can deduct the costs of your personal health insurance premiums. However, you need to meet certain criteria: 1) Your business must be claiming a profit, not a loss, for the tax year. 2) You must be ineligible for an employer's health plan, including your spouse's plan*. 3) You can claim premiums only for the months when you were not eligible for an employer's plan. Since health insurance can be quite expensive, this deduction can make a big difference.
Retirement Contributions: This is one of my favorite tax deductions because it also serves as a tool to prepare for your future — double win! This is not the piece where I break down the types of retirement plans that are available to you as a business owner, but know that contributions to your own retirement plan and contributions you have made to your employees' plans are tax deductible. "Plans like SEP-IRA's can be funded until April 15, so this is one of the few ways you can actually change your tax outcome after the tax year has ended," says Rahn. "You really want to work with a tax professional to help you squeeze the most savings out of this deduction."
Depreciation: Thanks to tax reform, business owners have more options to write off their business equipment like computers, furniture and machinery. You can depreciate the cost of assets over a period of years or in many cases, you can write off the entire cost in the year of purchase. A tax advisor can calculate your options so that you can decide what's best for your business this year and for the future!
Education: The IRS allows you to fully deduct education costs if incurring these expenses will help you maintain or enhance the expertise and skills you need to operate your business. This could include education expenses like classes, workshops, seminars, webinars, subscriptions to publications and books that pertain to your business. Transportation to classes even qualifies! Keep in mind that education expenses that pertain to a new career or are unrelated to your business do not qualify but may be eligible for other non-business tax credits.
Interest: If your business has debt like a small business loan or credit card, you are entitled to deduct interest paid to the lender or credit card company. If the loan is part business and part personal, you can deduct only the portion of the loan that is for business purposes. "You can make this easier to track if you have a dedicated credit card for your business, so you don't intermingle business and personal use," says Rahn.
Other Deductions: The above is by no means a comprehensive list. There are many other types of business deductions. Don't forget to include things like advertising and marketing expenses, gifts for clients and customers, salaries and wages, business meals, insurance premiums, bank fees, cost of goods sold, legal fees, maintenance and repairs, and moving expenses. Finally, as I end all of my pieces in this series, please consult a professional when deciding what you can and cannot deduct. I would hate for you to miss out on deductions and pay too much in taxes.
*All details were sourced from IRS.gov and blockadvisors.com
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. O'Keeffe Financial Partners and any other entity listed herein is not affiliated with Kestra IS or Kestra AS Investor Disclosures: https://bit.ly/KF-Disclosures
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