Making money with your small business is an adventure. Keeping it sometimes seems impossible.
With expenses, labor, marketing, and taxes money seems to flow out of your business as fast as it comes in.
One of the easiest ways to keep more money is to pay less in taxes.
And, having your own small business gives you a perfect vehicle to take advantage of many small business tax deductions. It’s easy if you know how to do it and impossible if you don’t.
The IRS makes some of this information available to you. But trying to research the IRS for tax information is like taking a sip of water from a fire hose on full blast.
The current tax code is about 2,600 pages. Add another 6,000 or so pages for IRS regulations and revenue rulings. Put it all together with all the statutory code, regulations, revenue rulings, and all the annotated case laws, and you will get about 70,000 like the CCH Standard Federal Tax Reporter.
The basic formula for small business owners is –
More deductions = Lower Taxes = More Money for You.
Ordinary and Necessary
The IRS allows you to deduct business expenses that are “ordinary and necessary.”
An ordinary expense is common and accepted in your trade or business. A necessary expense is helpful and appropriate for your trade or business. The IRS notes that an expense does not have to be indispensable to be considered necessary.
Here are the Top 9 Business Deductions for 2021:
#1 – Advertising and Marketing
Customers are the lifeblood of your business. But to hire you, first, they have to find you- and that takes advertising and marketing.
Whether you have an online business or a brick-and-mortar business store, the average business spends 11% of its revenue on marketing and advertising. Startups and online companies spend even more.
When you generate leads, send out flyers, or pay Google for business ads, the funds you spend marketing your products or services are legitimate business expenses.
Here are just a few of the expenses that apply:
- Email marketing
- Social media marketing
- Website payment
- TV and radio ads
#2 – Outsourcing, Freelancing and Contract labor
You can run your empire with few to no employees if you choose. There are 59 million freelancers in the US who will help you with any and all your business needs.
Instead of having armies of employees and drowning in the financial overhead, now you can hire only the people you need. Have a big project? Outsource some of the work. When the project is over – the freelancers move on to their next project.
They are not employees. You don’t need to withhold taxes, provide sick leave, or worry about their health insurance.
But the money you pay them is tax-deductible
#3 – Wages and salary expenses
No man is an island, and most businesses have at least a few employees. Whether you have an army of salesmen, a large group of customer service reps, or just a few key employees, the payments that you make to your employees are tax-deductible.
So are the monies you spend on employee benefit programs, like education assistance, insurance, and more.
There are some rules for deductions, like the employee must be engaged in tasks connected with your business. But generally, these expenses are deductible and should not be overlooked.
#4 – Car Expenses
Before the pandemic, car expenses were arguably the number one small business deductions. Now, with more Zoom meetings and fewer road trips, the amount you spend on your car is less, but it can still be a significant deduction.
The first and most obvious rule is that you must be using the care for work and not trips to the grocery store.
You can use one of two methods to claim this deduction:
- Standard mileage rate: The IRS allows you 56 cents per mile for the period beginning on January 1, 2021. This rate is for cars, vans, pickups, and panel trucks.
- Actual expense method:
- This is a little more complicated. You need to keep track of all your vehicle-related expenses, like gas, oil and tire expenses
- Keep records of your business trips. Where did you start, where did you go, and what was the purpose of the trip?
- The distance to and from your place of work isn’t allowed, but you can deduct travel expenses incurred for business purposes.
#4 – Insurance Expense
You may be spending more on insurance than you suspect. These days you seem to need insurance for everything. Insurance expenses are generally deductible as a business expense, including:
- Professional liability insurance
- General liability insurance
- Business vehicle insurance
- Workers’ compensation insurance
- Property insurance
#5 – Rent
You have to work from somewhere and may be entitled to a deduction for it.
If you pay rent for your office or factory, that is a real estate related expense. But the rent that you pay for your home isn’t permitted as a deduction.
However, many people have a home office, and then the IRS rules regarding Business Use of Your Home will apply. You might be able to deduct a part of your rent or mortgage interest as a home office deduction.
#6 – Interest Expense on Loans
Many businesses borrow money to grow faster. Whether you use a business credit card for expenses or a loan to increase inventory, money isn’t free, and you will be paying interest.
But you can deduct that interest from your taxable income.
To be deductible, it must be a loan with a legal obligation to repay the money, as a loan from a bank or financial institution. A loan from a family member might draw more scrutiny from the IRS. As with all business expense deductions, the loan must be for business and not personal purposes.
#7 – Legal and professional fees
America is a litigious society with a complicated legal and tax system. US businesses spend about 4% of their revenue on legal fees, more than 166% than the rest of the world. These business-related fees are tax-deductible, but personal legal fees are not. Business-related fees to your accountant and other professionals are also deductible.
#8 – Depreciation
Some business purchases can be deducted as expenses, and some cannot. When you purchase certain business equipment, furniture, and other assets for your business, you can’t deduct the entire amount from your income in the year you buy them.
However, you candepreciatethese assets over several years.
Not all assets qualify. Here are the general conditions you need to meet:
- You must own the asset.
- It must be used in your business.
- It has a useful time period greater than a year.
The expection to the rule is covered in Section 179 of the IRS Code. Section 179 allows for some assets to be depreciated all in the first year. The deduction limit for 2021 is $1,040,000.The Tax Cuts and Jobs Act of 2017 also raised the depreciation deduction on some types of property from 50% to100%.
#9 – Travel Expenses
Before the pandemic, business travel was one of the top business-related expenses. Flying across the country to meetings included airplane tickets, car rentals, hotels, parking, meals, and more.
But business travels volumes are only 40% of what they were in 2019.
And while business travel will return somewhat, 84% of the top companies plan to spend less on travel expenses post-pandemic.
But, if you are traveling for business now, your expenses could be tax-deductible. The IRS has rules for travel has rules:
Business travel must involve being away from your “tax home,” which is your business and not your family home.
And only certain expenses apply, like the ones below:
- Costs for airplanes, trains, busses, or cars
- Taxis (Uber, Lyft, and other rideshare services aren’t explicitly mentioned but should be deducted)
- Lodging and meals, if your business trip involves an overnight stay
Your Next Best Steps
Maximizing business expense deductions are vital to your company’s finances and cash flow.
At CE Accounting, we do not just crunch numbers. We analyze your numbers and your business goals to minimize your tax obligations.
Anyone can mindlessly input numbers into Quickbooks or other programs for you. Our CPAs, bookkeepers, and support staff prepare your returns based on your unique situation.
We help your business grow and thrive.
We are in the Washington DC metro area and have clients locally and nationwide.
Contact us today and let us show you your next best steps for minimizing your taxes.
Mandatory legal stuff: The above advice is considered general advice. It may or may not apply to your specific situation. Please contact us with your specific questions.