As a rapidly growing business, Black Forest Consulting understands the anxiety that many small businesses experience when it comes to filing their taxes. The tax code in the United States, as well as constantly changing rules, make matters confusing. One of the simplest ways to tackle tax season and increase your profits is to make sure you're taking all of the tax deductions you're entitled to. Understanding which company expenses are deductible can help you avoid overpaying at tax time and drive your business decisions all year.
BFC's mission is to assist business owners in achieving success at every stage of their journey. As a result, we've compiled a list of 24 write-offs that your company may be eligible for.
Advertising and Marketing
Advertising and marketing expenses for promoting your small business are deductible as long as the campaigns are designed to attract or retain customers. Here are some examples of qualifying advertising and marketing deductions:
Costs of producing physical advertising materials such as business cards or flyers
TV, radio, print, and online advertising costs
Influencer marketing
Business Meals
Depending on the purpose of the meal, business meals for employees, clients, and potential clients may be tax-deductible. There are a few principles to follow when determining whether or not a cost is deductible. The cost should be reasonable, not exorbitant or outrageous. When the meal is served to a current or potential business customer, consultant, client, or other similar business contacts, you or an employee must be present. If the food is served as part of recreational activity, it must be purchased separately from the activity. The following is a list of deductible percentages for various types of business meals:
Company-wide party – 100% deductible
Your own meals as part of doing business – 100% deductible
Office snacks and meals – 50% deductible
Business meals with clients – 50% deductible
Entertaining clients – 0% deductible
Business Insurance
The cost of business insurance is fully deductible if it is both ordinary and necessary for the operations of your company. The following are the most common types of business insurances that are eligible:
Data breach insurance
General liability insurance
Workers’ compensation insurance
Commercial real estate insurance
Professional liability insurance
Business Interest
The interest you pay on a loan for business reasons, such as a mortgage on commercial real estate, or a line of credit for business purchases, is tax-deductible. However, there is a limit, and it has been altered for the 2021 tax year. Now, you can only deduct up to 30% of your taxable income for interest expenses.
You must be legally liable for the acquired debt in order for the business interest to be considered tax-deductible. There must be a legitimate debtor-creditor connection between you and the lender, and the debt must be under the obligation to be repaid. The following are some examples of business interest deductions:
Investment interest expenses
Interest on purchases made on credit for inventory stock
Prepaid mortgage interest on loans for business property
Interest on credit card debt
Business Use of Car
You can deduct the costs of operating your vehicle for business purposes. The optional standard mileage rate used to deduct the costs of operating a business vehicle is 56 cents per mile as of January 1, 2021. If you want to deduct automobile expenses, you'll need meticulous records of the following items:
Registration fees and taxes
Gas and oil costs
Maintenance and repairs
Licenses
Vehicle insurance
Rental or lease payments
Tolls and parking fees
Business Bad Debt
Business Bad Debt occurs when someone owes your company money and you are unable to collect it. If you offer a product or service to a customer with the expectation that they will pay you later, and it becomes evident that you will not be paid, this can happen. To be deemed deductible, the debt must be largely or completely worthless. The value is determined by the likelihood that the debt will be repaid. The following are some examples of possible business bad debt:
Loans to clients, distributors, suppliers, and employees
Credit sales to customers
Business loan guarantees
Business Casualty Losses
You can claim a tax deduction if you own a business property that suffers theft or physical damage as a result of a sudden, unforeseeable incident. Here are several examples:
Natural disasters—fires, hurricanes, tornadoes, storms
Vandalism
Pandemic restrictions
Burglary
Civil disturbances
Charitable Donations
If you want to give back to your community by making charitable contributions, you can deduct the entire amount. If your company is a sole proprietorship, LLC, or partnership, you can deduct charitable contributions from your personal taxes. If your company is an S-corporation, charitable donations should be included on your corporate tax return.
To qualify for a tax deduction, the donation must be a monetary contribution to a qualifying organization, such as:
A church, synagogue, or other religious organization
A civil defense organization established under federal, state, or local law
A war veterans’ organization established in the U.S.
Contract Labor
Fees paid to a freelancer or independent contractor are fully deductible as long as they are not an employee of your small business and the services provided were for the benefit of your company. This may be paying a freelance editor to proofread monthly blog articles for your company's website, paying an independent accountant to analyze your small business taxes, or paying a web designer a one-time cost to optimize your business's website.
Depreciation
Depreciation enables you to allocate the cost of fixed and tangible assets over time. You must own the asset, use it in your income-generating operations, and it must have a useful life expectancy of more than one year in order for it to be eligible. The following are examples of depreciable deductions:
Computers
Machinery
Office furniture
Business vehicles
Education
You can deduct the expense of providing yourself or your employees with qualifying educational benefits such as continuing education, professional license courses, and industry-related seminars. The sole constraint is that educational spending must offer value to the firm by increasing workforce expertise and skills. As a result, you can't deduct educational costs that qualify you or an employee for a different trade, nor courses that are required to meet the job's minimal education requirements.
Employee and Client Gifts
Gifts to employees and clients can be deducted, but only to a certain extent. Gifts that are tangible and given in the course of business are tax-deductible up to a maximum of $25 per person. Sending a bottle of wine to a client or a gift basket to an employee who has had a baby are examples of this type of deduction.
Foreign Earned Income Exclusion
If you're a U.S. citizen who owns a small business in another country, you may be able to deduct your overseas earnings from your U.S. business tax return under certain conditions. This will prevent you from being taxed twice if you match the eligibility requirements below:
You are a U.S. citizen or resident alien
You have a qualifying presence in a foreign country met by the Bonafide Resident Test
You’ve paid foreign taxes on foreign earned income
Home Office
A home office is necessary for many small business owners, notably contractors and freelancers. You may be able to deduct the costs of setting up and running a home office if you use one. The amount of your deductible is determined by how much of your home is utilized for business. Divide the square footage of your office by the total square footage of your home to get this number.
Below are some example deductions associated with a home office. Remember, your office doesn’t need to be in a separate room, but it must be in a space solely designated to work and business operations.
Designated office phone lines
Paint and other building and improvement materials
A portion of utility bills
A portion of homeowners’ insurance
Investment Interest
Interest paid on money borrowed by your small business with the intention of investing it can be deducted. Deductible investment interest solely refers to interest paid on money borrowed to generate future investment income. Interest, dividends, annuities, and royalties are examples of assets that should appreciate in value over time. You cannot, however, deduct more in investment interest than you have in investment income.
Legal Fees
Legal fees paid by your small business are tax-deductible. This includes legal expenditures for cases you didn't win. Legal expenses for personal matters such as child custody, personal injury, and property disputes are not deductible. The following are some examples of deductible legal fees:
Fees for resolving tax issues
Fees related to whistleblower claims
Fees related to unlawful discrimination claims
Moving Expenses
If you moved your business in 2021, the costs associated with transporting business equipment, supplies, and inventory typically qualify as deductible. Relocating machinery and transferring inventory stock are examples of this.
Office Supplies/Expenses
Supplies required to manage and maintain a working office are entirely deductible. However, there are a few crucial IRS regulations that must be followed in order for a supply to be considered as a deduction. You must not keep a record of when the supplies are used nor take inventory of the supplies. Deducting these expenses should not significantly affect your company's final income.
Furthermore, if you purchased a large quantity of office supplies near the end of the year, you won't be able to deduct the cost this year because it's unlikely you'll utilize all of them in the calendar year. The following are some examples of tax-deductible office supplies and expenses:
Printers and ink cartridges
Janitorial and cleaning supplies
Work-related computer software, including software subscriptions
Internet hosting fees for your company’s website
Disposable kitchenware
Pens and paper
Phone and Internet Expenses
You can deduct phone and internet charges if they are essential for your business's operations. The one caveat is that if you use your work phone and internet for personal reasons, you can only deduct the portion of the expenditure that is related to the company.
Rent
Another deduction may be available if you rent office space, a warehouse, or some other kind of commercial property. As long as the property is used for business purposes, money paid toward rent and a company parking garage is eligible.
Retirement
You are responsible for funding your own retirement plan as a small-business owner. Fortunately, if your retirement funds comply with IRS standards and are deemed tax-qualified, your contributions are tax-deductible. Contributions to tax-qualified retirement plans are listed below:
Roth IRA
Simple IRA
Keogh plan
Solo 401(k)
Salaries and Benefits
You can deduct the cost of an employee's salary, benefits, and vacation pay if you own a small business with one or more employees. Regular wages, commissions, and bonuses are all included. An employee's wage and benefits cannot be deducted if the employee is a sole proprietor, a partner, or an LLC member. Furthermore, the salary and benefits must have been paid during the year you are claiming the deduction.
Startup Expenses
You can deduct up to $5,000 in startup costs if you started your small business in 2021. A start-up expenditure is considered deductible if it is a cost you would ordinarily deduct while operating an existing business but incurred before your business started. This can include things like:
Marketing costs
Travel costs
Training costs
Travel Expenses
You can deduct your expenditures if you travel to meet a customer, attend a conference, or for any other business-related reason. A trip must be ordinary, required, and to a destination outside of your state to qualify as business travel. The following are some examples of travel expense deductions:
Plane, train, or bus ticket costs
Parking and toll fees
Fares for taxis, Ubers, Lyfts
Cost of lodging
Hopefully, now that you've read through the entire guide to small business tax deductions, you're ready to take on tax season! For more business tips, visit us at BlackForestConsulting.org!
Sources:
Guillory, S 2021, 19 Small Business Tax Deductions To Know in 2022, Lantern Credit, accessed 22 January 2022, <https://lanterncredit.com/small-business/small-business-tax-deductions>.
QuickBooks 2022, 2022 complete list of small-business tax deductions, accessed 22 January 2022, <https://quickbooks.intuit.com/r/taxes/small-business-tax-deductions/>.
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