Tax time is just around the corner, but before you start to panic, take a deep breath because Incfile is here for you. It’s important for small business owners to be aware of tax deadlines and start to prepare and collect paperwork ahead of time.
But, have no fear — you’ve still got time to maximize your tax deductions for 2021!
To get ready to file your business taxes, you’ll want to take note of the common tax deductions and credits in this list. If you find some that apply to your business, be sure to collect the necessary paperwork and submit it on your business taxes or hand it off to your accounting service.
Do Tax Deductions Increase Your Refund?
Before we jump into the list of most common tax deductions and credits, it’s important to understand just how a deduction or credit can impact your taxes. Your small business tax responsibilities are not as simple as filing your taxes as an individual.
As a small business owner, it's likely you file your taxes as a "pass-through" entity, meaning they’re passed on to your personal tax return. The only type of business that pays taxes directly to the IRS is a C Corp. If your business is a sole proprietorship, LLC or S Corp, your taxes will pass through and show on your personal tax return.
In simple terms, your business pays taxes on your profit. Your profit is the amount left after you subtract your deductions from what your business earned. This means that the more deductions you take, the lower your business profit, which can affect the amount of tax you pay. This is why it’s critical to track your expenses and claim business deductions.
Tax deductions can also increase your tax refund. This can get a little complicated, so bear with us. A refund is a repayment from the IRS for withholding too much tax money. You might get a refund if you choose to withhold a higher than normal percentage of taxes from your paycheck or if you overpaid on your quarterly taxes.
Here's a common scenario: A business owner pays quarterly taxes on their expected income but then makes less money than planned. If this was the case, the owner would receive a refund for overpaying on quarterly taxes.
As a small business owner, there are a number of things you can deduct from your business income, which is called a tax deduction. In addition to tax deductions, there are tax credits. A credit is when your taxable income is reduced by a set amount.
Knowing what you can deduct from your business taxes and potential tax credits that your small business is eligible for will help you to navigate tax time this April.
Common Tax Deductions and Credits You Should Know About
As the April 15 deadline to file your taxes with the IRS quickly approaches, you'll want to start gathering your deductions and apply for tax credits as efficiently as possible. These tax deductions and credits are commonly overlooked — get them on your radar to help reduce the amount of money you owe and increase your potential refund.
There are a number of costs associated with starting your business. You might hire someone to research the market you’re planning to break into or travel to secure contracts with specific distributors. All of the money you spend in planning and preparing to launch your business can be deducted from your business income. The IRS has some helpful information about how to tell if a startup cost is deductible or not.
Home Office Deduction
If you operate your business out of your home, you can deduct part of your home expenses as a home office deduction. This deduction is for those who use a portion of their home regularly and exclusively for business.
With a home office deduction, you can deduct some of your home expenses that are proportionate to the percentage of your home that’s used for business. So, if your home office takes up 10 percent of your home’s square footage, you can deduct 10 percent of your home expenses as a business deduction.
Home expenses that can be deducted include:
Rent or mortgage interest
If you don’t want to do all that math, you can use the IRS’s standard home office deduction. This allows you to deduct $5 per square foot of your home used for business purposes, up to 300 square feet.
As a small business owner, you can deduct the mileage you drive for business purposes in your personal vehicle. The mileage deduction rate for 2021 is 56 cents per mile. This deduction works best if you track it all year long. You can track your miles by hand or use a mileage tracking app such as MileIQ or QuickBooks.
If you haven't tracked your miles for the last year, you can recreate them. Look back on your calendar for any business appointments. Then, you can use your phone's map app to see your location on those days. This will allow you to calculate the number of business miles you drove throughout the year.
Child and Dependent Care Credit
If you are the parent of a child younger than 13 and you take them to a school care program, daycare or day camp so that you can work or actively look for work, you may be eligible for the Child and Dependent Care Credit. This credit is a dollar-for-dollar reduction in your taxes for what you spent on child care.
Health Insurance and Medical Expenses
As a small business owner, some of your medical expenses are tax-deductible. You can deduct:
Health insurance premiums for you and your family
Medical expenses, if they exceed 7.5 percent of your taxable income
Exercise equipment, a gym membership or a swimming pool If your doctor recommends exercise
Learning new skills and doing ongoing training and education is a critical part of being a small business owner. As such, you can deduct some education expenses from your taxes. According to the IRS, to be deductible, an education expense must be something that “maintains or improves skills needed in your present work.” If this criteria is met, it can be deducted from your taxes.
If you take out small business insurance, that expense is deductible from your taxes. Deductible insurance expenses include:
Business continuation insurance
Workers’ compensation costs
Auto insurance for business vehicles
Employee’s life insurance
Business interruption insurance
Office Supplies and Software
Another business deduction that you’ll be eligible for as a small business owner is for your office supplies and software. If you buy something that will be used to operate your business, it can be deducted.
Common business supply deductions include pens, paper, planners, laptops, computers and software such as Microsoft Office, Zoom or QuickBooks. Office supplies can even include big items, such as a desk or office furniture to outfit your home office. This is just a shortlist of possible software and supplies you might need for business and would be eligible to deduct.
Meals, Coffee and Entertainment
If you’re planning to take clients out for lunch or to entertain a potential client in hopes of getting their business, you can deduct those expenses. An important thing to note about this deduction: Meals are only deductible up to 50 percent. If you’re planning to deduct meals and entertainment expenses from your taxes, be sure to save your receipts and note the purpose.
Employee Salaries, Benefits and Gifts
If you employ people in your business, their salaries, bonuses and commissions are tax-deductible. As well, employee gifts up to $25 per year, per employee is also deductible.
As a small business owner, you benefit by knowing what expenses you can deduct from your taxes and optimizing those expenses to limit your end-of-year tax burden. If you’re ever not sure about deductions, you can find a number of business tax resources online to help guide you.
You can also access Incfile's Accounting and Bookkeeping service for professional help filing your taxes with the IRS. As the deadline for submitting your taxes quickly approaches, the sooner you can get started, the less stressful the process will be. Get started with a free tax consultation today.
Page is a freelance content marketing writer with experience writing about small business, the future of the workplace and health. She also operates a weekly email newsletter where she shares advice on living an authentic, intentional life. When not writing, you can find Page traveling, fostering older cats and working as a sexual assault advocate.