Owning a small business has many perks, one of them being tax deductions! Many small businesses do not realize the number of tax deductions they are allowed, which is unfortunate because many of these deductions help small businesses grow and become more profitable. By giving small businesses breaks on certain value-added expenses, the government knows that the businesses will earn more in the future, create more jobs, and generate more tax revenue. So, the process really becomes a win-win situation for all.
It is important for every business to be aware of the tax deductions allowed by the IRS. If you aren’t sure what they are, you’ll find the 8 must-have small business tax deductions below. But as always, be sure to consult a tax professional to determine if your business qualifies for these or other deductions.
Business Meals & Entertainment
- How it works: You can deduct 100% of qualifying meals if they came from a restaurant in 2021 and 2022, up from 50%. The IRS does have some strict rules on these types of deductions because of common abuses. In order for an expense to qualify, it needs to either be directly related to the business or associated with the business. The easiest way to determine if this deduction is allowed is to honestly ask yourself if the purpose of the entertainment was to increase the value of the business. Entertainment expenses are a little trickier. Taking a client to a game or a concert is not deductible. However, team building activities for the benefit of your entire staff are tax-deductible, even if that team building activity includes going to a sporting event or a concert. Make sure you keep the receipts.
- Why you can deduct: The IRS knows that not all business happens in a strict business setting. The fact is, the IRS wants to allow you to do business in the setting that will best suit your business needs and interests, and many times the best business deals do not happen in a typical office environment. So go out with clients, enjoy a meal, make everyone happy, deduct the expenses, and ultimately grow your business.
- How it works: When you travel for business, you can deduct 100% of the ordinary and necessary expenses while traveling away from your normal place of business. Typical deductions include plane tickets, meals, taxis, hotels, dry cleaning, phone calls, car miles, tips, and any shipping of material needed for business. Putting all business expenses on a small business credit card will allow you to keep track of all business expenses come tax time.
- Why you can deduct: It would be nice if all business came to you, but that is never the case. There are many instances where travel is necessary to increase the value of your business. You may have to travel to do negotiations, train and attend seminars, meet new business clients, survey new locations; the list goes on and on. These expenses are 100% needed for any business to expand and are therefore 100% tax-deductible.
- How it works: Most education expenses are 100% deductible. In order to qualify for the deduction, the education received must be related to your business. Education gained to further your skills and run your business more effectively can be extremely crucial to growing your business and can also be deductible, leaving you with great knowledge for a small price. You can find out if your expenses are deductible on the IRS’s form, Are My Work-Related Education Expenses Deductible?
- Why you can deduct: The IRS loves this deduction. Many people and businesses don't like to outlay money without seeing an immediate return. Education is one of those expenses that will pay off over time. The IRS knows that further education and increased future income have a high correlation. This is one situation where the IRS understands that if they give you the deduction now, you will make more money in the future and in turn, pay more taxes.
- How it works: If you are moving because of your business the expenses incurred from the move may be tax-deductible. In order to qualify, you must have moved because of the business and the new workplace must create an additional 50-mile commute from your old residence. Make sure you research your move first because you could encounter a lot of hidden expenses.
- Why you can deduct: Most people can no longer deduct moving expenses, but business owners who move at least 50 miles away because of the business can deduct those expenses. The IRS uses the 50-mile rule since they determined that 50+ miles would be an unreasonable additional distance to drive for work. The IRS makes moving expenses deductible because they want to make the costs of a move less of a determining factor when one may be deciding to take the step to a new location. The IRS knows that typically when someone moves for business it is because of greater expected financial returns.
- How it works: If you use your car for business purposes, you can deduct car expenses. If your car is used for both personal and business matters, you must separate the expenses by using the percentage of miles used for business purposes vs. personal purposes. The IRS gives two options for this; either standard mileage rates or actual expenses paid. Standard mileage rates for 2021 are 0.56 a mile, increasing 2.5 cents a mile for 2022. Typically, using the standard mileage rate is easier and yields a greater deduction; however, this may not always be the case.
- Why you can deduct: Car expenses are standard and legitimate business expenses that are both necessary and reasonable. This deduction should never be overlooked because it can add up to a significant amount of money on an annual basis.
- How it works: The IRS allows you to deduct certain taxes that are related to your business. Typical taxes that you can deduct are state, local, certain federal taxes, and foreign taxes that are related to your business operation. Taxes you cannot deduct are federal income taxes, estate and gift taxes, inheritance taxes, legacy taxes, and succession taxes.
- Why you can deduct: The IRS allows certain approved taxes to be deducted because they are necessary and required for the businesses to run (except income taxes).
- How it works: If you use your home for business then there is a chance that you can write off part of it as a business deduction. Home expenses may include rent, insurance, maintenance, mortgage interest, and depreciation. The IRS has requirements in order to qualify:
- Regular and exclusive use: You regularly use part of your home exclusively for business purposes.
- Principal place of business: Your home must be your principal place of business
- Why you can deduct: The IRS realizes that if you did not use your home for business, you would likely have to rent a place that would likely cost your business more money. If the IRS did not allow the home office deduction, they realize that it may be more financially beneficial for a company to rent a higher costing office to get the deduction, which in turn would create severe inefficiencies. The IRS rewards individuals who work from home because it is likely they are trying to be efficient and increase their bottom line.
- How it works: Certain bad debts can be deducted. If your business is not paid for the costs of goods, this debt can be deducted. However, if your business is not paid for the services that it provides, you cannot deduct these expenses. In order for bad debts to be deducted, there must be an actual loss of money. The IRS will not compensate you for time lost on a project that in the end you do not get paid for, but, if you paid someone else to provide services for you and you never get paid, the cost of that labor can be deducted. You can deduct 100% of your fully worthless business debt.
- In addition, if you received a PPP loan (Paycheck Protection Program) and qualified for forgiveness, that money doesn’t count towards your gross income.
- Why you can deduct: Bad debts happen on a frequent basis to many businesses. Allowing businesses to write off these bad debts will help keep more productive capital within the company that can be used for more profit-producing activities in the future.
As you can see, the IRS is not just giving out business deductions to be nice but they actually have a huge incentive in mind. Deductions provide more money for you, and eventually more money for them, leaving everyone happy in the end. So, again, if you aren’t already taking advantage of these deductions, you really should look into why you aren’t.