Whether your small business is thriving or going through a rough patch, you always want to maximize your revenue streams while decreasing potential losses. One great way to help ensure positive cash flow is to make sure you’re taking advantage of every available income tax deduction at your disposal, especially as we all attempt to navigate these challenging times.
Keep reading to discover 10 small business tax deductions that can help your business weather the storm and pay less in taxes.
1) Employee Retention Tax Credit
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a credit of 50% “of wages paid by employers to employees during the COVID-19 crisis.” The credit applies to “the first 10,000 of compensation, including health benefits, paid to an eligible employee.”
Even if your company is unable to generate any taxable business income due to COVID-19, you still receive the employee retention tax credit, because this credit is what’s known as a “refundable tax credit.” But note that to qualify, your company’s operations must have been “fully or partially suspended due to a COVID-19 related shutdown order,” or your quarterly revenues must be more than 50% less than you reported the previous year.
2) Employee Gifts
Many thoughtful employees like to give away non-cash employee gifts during the holidays, at company retreats, and to celebrate milestones, anniversaries, sales goals, and retirements. Not only is this a great way to show employee appreciation and improve company culture and morale, but you can even deduct some of the costs. You may deduct gifts for employees under the following guidelines:
- Deduct as much as $25 in non-cash gifts for each employee
- Deduct as much as $1,600 for non-cash gifts for service awards and achievements for each employee
3) Work Festivities
All work and no play leads to uninterested and unmotivated employees, which is why many companies try to throw a few staff parties every year to keep things fun and loose — especially during the holidays. If your work party is for the express enjoyment of your employees and their families, you might be able to deduct as much as 100% of the costs associated.
However, the situation is a little different for promotional events. You can still deduct some of the costs, but if the party invite list includes friends, vendors, or customers, you may only be eligible for a 50% deduction.
4) Fuel Tax Credit
Unfortunately, you can’t claim the fuel you use for your daily commute to the office, but you can claim fuel that your business uses to operate equipment and machinery. For example, if you own a landscaping business, the fuel you use to power your lawnmowers, weed whackers, leaf blowers, and other essential equipment is deductible.
5) Cleaning Supplies
It’s important to keep your office, business vehicles, and work-related materials clean and in good working order. And since you can deduct all the cleaning supplies you need for your business on your tax return, you’ve got one more reason to keep your workspace, vehicles, and supplies clean all year long.
6) Accounting Fees
Keeping track of your small business expenses, revenue, and payroll can get overwhelming in a hurry — not to mention tax records, credits, and deductions. If you enlist the help of a friendly accounting professional at any point during the tax year, you can deduct these costs on your annual tax returns.
7) Credit Card Interest
Business owners are allowed to deduct any interest accrued on company credit cards. However, a word of caution: you’ll need to keep detailed, accurate, and comprehensive records of every purchase on your business credit card, and you’ll also need to retain your monthly statements since they provide a record of the interest on your charges.
Most importantly, never mix personal purchases with business purchases on your company credit card. Personal purchases are not deductible, and trying to deduct them could lead to an IRS audit with severe financial and legal consequences.
Tradeshows aren’t cheap. Between travel, tickets, booth design, and supplies, the price tag can quickly rise into the tens of thousands of dollars, even for small, regional events.
Fortunately, most of these costs are deductible. So, if you’re thinking about skipping a potentially lucrative tradeshow that brought in new business last year, you may want to reconsider. If you deduct your costs properly, the final bill could be far less than you think.
9) Personal Items for Business Use
In most cases, it’s very important to keep your personal and business items. However, in some instances, you can deduct the cost of personal items that you convert and use for business purposes.
For example, if you previously owned a computer for entertainment purposes but now use that computer exclusively for work-related tasks, you can deduct the value of the computer based on the date you began using it for work.
Deducting personal items based on business use can be tricky. Unfortunately, any mistakes could potentially lead to major tax issues. Contact a skilled and experienced tax attorney today to clear up the confusion and avoid problems.
10) Startup Funds
Did you start a new business this year? If so, you may be able to deduct many of the costs that you spent to get that business up and running. Under certain conditions, you can deduct as much as $5,000 against pre-launch activities. Also, you may be eligible to amortize (gradually write-off initial costs) even more over the next 15 years.
Remember, though, startup expenses are only tax deductible if they’re made during the planning and development phase of your business — that is, the pre-launch phase. Once you’ve opened your doors, any costs you accrue are no longer considered regular operational expenses and are subject to standard tax rules.
11) Home Office
If you use part of your home for business, you can deduct related expenses as long as you meet the IRS’ requirements and keep detailed records. The home office deduction is available whether you rent or own, and it applies to all types of homes — even houseboats!
However, you can only claim the deduction if the space you’re using is dedicated exclusively to conducting business. So, if your home office doubles as a guest bedroom, you can’t claim any deductions for it. Your home office also needs to be your principal place of business, which means you must the space regularly for essential business activities like billing, bookkeeping, and other business management tasks.
The simple way to deduct your home office expenses is to deduct $5 per square foot for up to 300 square feet of office space. There’s also a more complicated method in which you measure direct (painting, repairs) and indirect (mortgage interest, utilities, insurance) office expenditures against the overall costs of renting or owning.
12) Health Insurance
If you’re self-employed and you bought health insurance policies for yourself or your family, you may be able to deduct the premiums from your taxes. The deduction covers all types of premiums for both medical and dental insurance, and you don’t necessarily have to itemize deductions to claim it. However, you’re not eligible to claim this credit if you can enroll in your spouse’s employer-provided health insurance plan, so make sure not to skip out on available coverage just to get a deduction.
13) Retirement Savings
Self-employed business owners don’t have to miss out on the benefits of contributing to a 401(k) or other qualified retirement plan. For 2020, you can deduct contributions to a qualified retirement plan up to $57,000 ($64,500 if you’re 50 or older) or 100% of earned income, whichever is less.
Retirement plans that qualify for this tax deduction include SEP-IRAs, SIMPLE IRAs, and solo 401(k)s. Note that contribution limits vary by plan types, and the IRS adjusts the maximum deductible contribution each year.
Contact S.H. Block Services for Help with Your Small Business Tax Deductions and Returns
If you need help reducing your business’ tax bill, please contact S.H. Block Tax Services today to speak with one of our skilled and experienced tax attorneys. Our attorneys and support staff have years of experience helping small business owners identify helpful and lucrative tax credits and deductions. We also have certified and trustworthy bookkeepers who can help you keep accurate and detailed records all year long.