‘Tis the season—tax season! Although it may sound like a ton of paperwork (which, to be clear, it is), this time of year also presents tons of savings opportunities for small businesses like yours. I’m talking deductions, AKA write-offs, AKA ways to reduce your taxable income for the tax year 2021.
With January in the bag, most small business owners have sent out tax forms to their employees and independent contractors. Now is a good time to start gathering your own documents to file your business takes. To help you get a handle on what small businesses can write off this year, we’ve created a small business tax deductions checklist for 2021.
Before we dive in, let’s pause and define a key phrase: “ordinary and necessary.” These two words are the criteria by which the Internal Revenue Service (IRS) decides whether business deductions are legitimate or not.
- Deductible expenses must be ordinary. That is, they should be considered normal throughout your industry.
- Deductible expenses must also be necessary. That means the expenses should be appropriate for the particular industry. (So, no, you probably won’t be able to write off a jacuzzi for the breakroom.)
As long as your expenses are ordinary and necessary, there are plenty of opportunities to save on your taxes for 2021. Here are 10 tax deductions worth considering*:
*Please note that while we’re small business pros, we’re not certified tax professionals. Be sure to consult with your accountant or financial advisor to determine the best course of action for you and your business.
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2021 Small Business Tax Deduction Checklist
1. The qualified business income deduction
Under current tax law, many business owners can claim a 20% deduction of their qualified business income. Eligible small business owners who file Form 1040 can take this one, though it phases out once you reach an income level of $160,700 for single filers and married filers filing separately, or $321,400 for married taxpayers filing jointly.
2. Home office expenses
With so many people working from home in the past year, you’ll want to closely review the IRS’s rules around home office deductions.
You can calculate this deduction in two ways:
- The simplified method is to deduct $5 per square foot used, up to 300 square feet.
- The standard method is to add up all costs of maintaining your house. This includes mortgage interest or rent, real estate taxes, utilities, and maintenance costs such as house cleaning and landscaping. Multiply the total cost by the percentage of the square footage that you use as your office.
Keep in mind that we’re talking about the IRS here, so you have to meet specific criteria:
- First, your home office has to be your principal place of business. You must conduct most business from your home office. For most people, this will be easy for 2021!
- Next, your home office must be regularly and exclusively used for business purposes. This means it doesn’t count if you use your dining room table for work and for eating. Even if you’re in a small space, you should mark a designated work spot. (Consider taking photos of this space to keep in your tax documents in the rare event you get audited.)
3. Phone and internet costs
If you’re using the internet at home and a personal cell phone for both work and personal use, you can only deduct the portion of the bill that is used for work. Be sure to keep clear records (again, in case the IRS comes calling). If you use a home landline, you can only deduct a second landline for work purposes.
4. Salaries, benefits, and contractors
You can deduct what you pay employees as salary, paid vacation time, and benefits. If you hire independent contractors, you can deduct their fees, too.
5. Interest on business loans and credit cards
To say this past year was a tough one is an understatement. Countless businesses have had to take out loans or use credit cards to stay afloat. The good news is that the interest on these debts is tax-deductible—so long as the following statements are true:
- The debt is in your name. If someone takes out a loan on your behalf, but it’s in their name, you are not legally liable for the debt. So you can’t take a deduction on the interest, even if you make all the payments. If you are legally liable, the interest is tax-deductible.
- You and the lender intend that you will repay the loan. If you don’t have to repay, it’s a gift, and you can’t write off the interest.
- The lender is really a lender. Getting a loan from a family member is a little sketchy in the eyes of the IRS if you’re trying to deduct interest.
6. Moving expenses and rent expenses
Moved last year? Unfortunately, you may not be able to deduct those expenses. Under the most recently passed tax law, the Tax Cuts and Jobs Act of 2017, only members of the US military can deduct costs related to relocating their private residences.
If you had to move your business, however, you can deduct those expenses from your tax bill. You can also deduct the cost of renting a place of business—but not the cost of renting your home if you have a home office. (See deduction #2 above for more information.)
7. Business meals
You can deduct up to 50% of a business meal, as long as you discuss business either before, during, or after the meal, so keep your receipts. Consider writing down the purpose of the meeting or main points discussed on the back of each receipt, in case you’re audited. (Psst—looking for easy tax software? Check out Intuit ProConnect’s ProSeries.)
8. Costs related to using your car for business
If you have a car used exclusively for business, then the whole cost of owning and operating it is deductible.
If you use your motor vehicle for both business and personal trips, keep careful track of the business mileage. There are two ways to take the deduction:
- Calculate the standard mileage rate. Take the total number of business miles you drive for the year and multiply it by the standard mileage rate. For 2021, the rate is 56 cents, a small decrease from 2020’s 57.5 cents.
- Use the actual expense method. Keep a record of all car-related costs for the year—gas, oil, repairs, tires, taxes, and licenses. Multiply the total cost of using the vehicle by the percentage of the annual miles driven for business.
9. Other expenses
Here are a few more business expenses you may be able to write off for the 2021 tax year:
- Advertising and promotion are completely tax-deductible. Launched a new website? Redesigned your logo? Ran a marketing campaign? Sent out advertising mailers? It can all come off your tax bill!
- Premiums paid for business insurance are deductible. This can include health and dental insurance for employees, property insurance, liability insurance, and workers’ compensation.
- Many professional fees—such as fees paid to a lawyer, accountant, or customer engagement service like Ruby—are tax-deductible.
10. COVID-related business assistance
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) introduced emergency funding through the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program, as well as many new tax credits. Be sure to review the credits below to know if they provide any benefit to you.
- Employee Retention Tax Credit (ERTC). The ERTC credit was created as a way to keep staff employed after government-mandated closures or substantial profit loss (more than 50% for any given quarter).
- Families First Coronavirus Response Act (FFCRA). The FFCRA required sick/family leave to COVID-19 affected employees and provides eligible tax credits for 100% of qualified sick-leave pay and related FICA taxes.
- Business interest expense deduction increases. Certain business interest expense deductions have increased to 30%-50% of adjusted taxable income.
We hope this small business tax preparation checklist helps you save some money this year! The big question is what you’ll do with the money you save. You could invest it back into your business. Or upgrade your equipment. Or, better yet, save even more money and accelerate your business’s growth by hiring a service like Ruby to engage with your customers over the phone and via website chat.
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