Small businesses seek measures to save money and utilize credits and deductions during tax season. Here are some tax tips for 2021, which will be especially useful if you manage a small business:
1. Carry the health credit forward
On a sliding scale, the healthcare tax credit is available. Businesses with less than 10 full-time-equivalent employees and average annual pay of less than $25,000 per person benefit the most. Calculate your eligibility for the credit using form 8941. You may be eligible to carry the credit forward if your company did not owe taxes in that year. If there is any remaining tax premium, you can deduct business expenditures from it.
2. Deduct section 179 property
Small firms can choose to deduct the full cost of some assets as an expense in the year they were first used. Section 179 property is what it’s called, and it can include up to $1,000,000 in qualified company property in the 2021 tax year. The following are some examples of deductibles:
- Property used in manufacturing, transportation and production
- Any type of facility used for business or research
- Buildings used to hold livestock or horticultural products
- Off-the-shelf computer software
- Investment property
- Land outside of the U.S.
- Buildings that provide lodging
- Buildings that are used to store air conditioning or heating units
3. Take a deduction for stock contributions that have appreciated in value
Throughout the year, many small businesses make charitable contributions and deduct the amount provided. Donating appreciable equities rather than cash is one approach to maximize these contributions. Your company can deduct the current value of the shares at the time of contribution, rather than the initial purchase price.
4. Submit a claim for all income that has been reported to the IRS
The IRS receives a copy of your 1099-MISC forms so that they can compare what you’ve reported to what they know you’ve received. Make sure the amount of income you submit to the IRS matches the amount shown on your 1099s. For the IRS, failure to do so constitutes a red signal. Even if a client fails to send a 1099, you must still record the income. When it comes to state taxes, the same restrictions apply.
5. Keep business and personal expenses separate
If the IRS audits your firm and discovers personal costs mixed in with business expenses, regardless of whether you correctly reported business expenses, the IRS may begin looking into your personal accounts. Always open a separate bank account and credit card for your business and use it just for business needs.
6. Identify and classify your company correctly
If you don’t classify your business correctly, you could end up paying too much in taxes. Your taxes will be affected differently depending on whether you categorize your firm as a C Corporation, S Corporation, Limited Liability Partnership, Limited Liability Company, Single Member LLC, or Sole Proprietor. Small businesses should contact a lawyer and an accountant to establish how their company should be classified.
7. Keep detailed records
Your tax return will be right if you keep detailed and precise records throughout the year. If your records aren’t kept properly, you could be missing out on deductions or, worse, putting yourself at risk of an audit. It is advisable that every business invests in a basic accounting software package because it is user-friendly, economical, and lets you stay on top of all your income and expenses.
What are the Tax Deductions for Small Business?
An expenditure that you can subtract from your taxable income is known as 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. A list of small business tax deductions frequently available to sole proprietors and firms formed as partnerships or limited liability companies is provided below.
1. Advertising and Promotions
Advertising and promotion expenses are fully deductible. This can include items such as:
- Getting a logo designed for your company
- Printing costs for business cards or brochures
- Buying ad space in a print or online publication
- Clients’ greeting cards
- A new website is being launched
- A social media marketing campaign is being run
- Sponsoring an event
You cannot, however, deduct payments made to influence legislation (lobbying) or to support political campaigns or events.
2. Business Meals
In most cases, you can deduct 50% of eligible food and beverage expenses. To be qualified for the deduction, you must meet the following criteria:
- The cost must be a normal and necessary component of running your company
- Under the circumstances, the meal cannot be rich or excessive.
- At the dinner, the business owner or an employee must be present
- You can also deduct 50% of the expense of supplying meals to employees, such as ordering pizza for dinner when your team is working late. Food served at office gatherings and picnics is completely tax deductible
Keep records of the occasion, including the amount of each spend, the date and location of the meal, and the business relationship of the individual with whom you dined. On the reverse of the receipt, make a note about the purpose of the dinner and what you talked about.
3. Business Insurance
The premiums you pay for company insurance are deductible. This could involve the following:
- Coverage for your furniture, equipment, and structures.
- Liability insurance
- Employees are covered by group health, dental, and vision insurance.
- Malpractice insurance is a type of professional liability insurance.
- Coverage for workers’ compensation
- Insurance for commercial vehicles
- Employee life insurance is available as long as the company or its owner is not named as a beneficiary on the policy.
- Business interruption insurance compensates you for lost income if your company is forced to close due to a fire or other disaster
4. 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. Fees from personal bank accounts or credit cards are not deductible.
5. Business Use of Your Car
Do you run a business out of your car? You can deduct the entire cost of operating your vehicle if you use it only for business purposes. You can only deduct the costs associated with work trips if you utilize it for both business and personal vacations. You can select between two strategies for deducting automobile expenses, depending on which one provides you with the most tax benefit.
- The standard mileage rate applies. Multiply the number of business miles you drove during the year by a standard mileage rate. The normal mileage deduction for miles driven in 2020 is $0.5712 per mile. It will be $0.56 per mile in 2021.
- Method of calculating actual costs. Keep track of all vehicle expenses for the year, including gas, oil, maintenance, tires, insurance, registration fees, and leasing payments. Multiply those costs by the percentage of business miles driven.
When it comes to small business owner taxes, owners can be at a disadvantage. They may not have the time or resources available to educate themselves on what they need to know and do when tax season rolls around. Fortunately, there are experts out there who specialize in helping those with less knowledge navigate this process as smoothly as possible such as TFX.