Running a business can be an expensive undertaking. After the financial uncertainty of the past year and a half, you may face more financial pressure than usual. While many business owners dread tax season, it can be an opportunity to save money and mitigate recent losses.
As a small business owner, many of your expenses may be deductible. You likely know a few things you can write off, but there are probably more savings opportunities than you realize. Here are 10 tax write-offs you should know about when it comes time to prepare your 2021 taxes.
1. Business Casualty Losses
Perhaps the most noteworthy deduction to take note of this year is business casualty loss. If your commercial property experienced damage or theft resulting from a federally declared disaster, you could deduct up to 100% of those losses. Natural disasters, vandalism, and civil disturbances, all of which have been prevalent recently, qualify.
COVID-19 presents a unique situation regarding these deductions. Since the pandemic itself didn’t cause physical damage, COVID-related losses may not count. That said, past cases have ruled that casualty loss may be available apart from physical damage in some situations.
The pandemic has caused demonstrable losses that could apply here, especially in property value. If applicable, these deductions could be significant, so they’re worth considering. Even apart from COVID-19, widespread emergencies have made many people eligible for business casualty deductions.
2. Phone and Internet Expenses
One expense you can certainly write off this year is your business’s phone and internet costs. If your business relies on phone and internet services, you can deduct their cost. Since so many companies have embraced remote work in the past year, that now applies to far more people.
Zoom was Apple’s most downloaded free app in 2020, showcasing how vital internet services have become for businesses. Even if you don’t have remote employees, you likely run something on the cloud or contact potential customers and partners over the web. If you do, you can most likely deduct it.
If you use your phone or internet for business and personal purposes, you can only deduct the amount that goes toward work. Keeping itemized records of your phone and internet use can help you determine how much you can write off here.
3. Salaries and Benefits
As a small business, employee salaries and benefits likely constitute a large portion of your expenses. Thankfully, you can write these off on your tax return to mitigate their financial impact. This deduction covers everything from regular wages to commissions to bonuses and even vacation time.
You should be aware that there are some stipulations to deducting salaries and benefits. You can only write off payments to employees who aren’t partners, sole proprietors, or LLC members. They also don’t count if they have any degree of leverage over you, like if they’re investors or personal acquaintances.
This write-off also requires the payments in question to be reasonable, ordinary, and necessary. If you paid someone for work they didn’t actually perform, you can’t deduct it. Generally speaking, though, most if not all of your employees’ wages should fall within these limits.
4. COVID-Related PPE
Medical expenses are another popular write-off for businesses that now carry more weight. Earlier this year, the IRS announced COVID-19 personal protective equipment (PPE) is now eligible for reimbursement under Section 231(d). That means any PPE you’ve purchased as a business in the tax year is now deductible.
The most obvious examples of COVID-related PPE are face masks, hand sanitizer, and sanitizing wipes. You’ve most likely purchased some of these items for your business within the year. If so, you can write them off. You can also reimburse these under health care flexible spending arrangements, health reimbursement arrangements, health savings accounts, or Archer medical savings accounts.
Keep in mind that if you deduct PPE under any of these arrangements, you can’t also deduct it under Section 231(d).
5. Charitable Contributions
The past year or so has been challenging for many people, so you might’ve contributed to charity to help out. If you’ve made these donations under your business’s name, you may be able to deduct them. While these deductions are more limited for companies than individuals, you can still benefit from them as a business.
Your charitable gifts must be cash, fall under the current tax year, and benefit a qualified organization to qualify for the deduction. The IRS has a charitable organization search tool you can use to make sure your donations qualify. These typically include things like religious, civil defense, and war veterans’ organizations.
You’ll file these differently depending on the kind of business you run. If your company is a sole proprietorship, LLC, or partnership, you’ll claim these deductions on your individual tax form. Otherwise, you’ll use a corporate tax form.
Many business owners have to take out loans to cover operating or startup expenses. Given the widespread financial hardships of the past year, these situations are more likely this tax season. If you’ve taken out a business-related loan this tax year, you can deduct the interest you’ve paid on it.
Interest from credit card payments also falls under this category. As long as you are legally liable for the debt, have a genuine debtor-creditor relationship, and the loan isn’t a gift, you can deduct the interest. You should also note that capitalized interest, like that added to a mortgage’s principal balance, doesn’t count.
You may have a loan or credit card payment that is part business and part personal. If that’s the case, you can write off the business portion, but not the entire amount.
7. Home Office Expenses
Another relevant tax write-off for 2021 is home office expenses. At the end of 2020, 41.8% of American workers worked remotely, and 26.7% expect to still do so by 2021. If you’re in that group, you can deduct expenses related to maintaining your home office.
Home office expenses include things like rent, utilities, designated phone lines, home repairs, and housekeeping services. You can’t deduct the entire cost of these expenses, but you can write off however much goes towards your work. You also have to use part of your home regularly and exclusively for work for it to count as a home office.
There are two ways to calculate the total here. With the simplified method, you deduct $5 for every square foot of your home used for business, up to $1,500. The standard method involves adding all the relevant expenses then multiplying them by the percentage of your home you use for work.
8. Advertising and Promotion
You’ve most likely engaged in some form of marketing in the past year. On average, marketing accounts for 11.7% of overall company budgets, and in some sectors, it’s close to 20%. That’s a considerable amount of money going to advertising and promotion. As a small business, you can deduct all of it.
Any money you spend on campaigns to get new customers or retain current ones is eligible for deduction. That includes printing costs, influencer marketing, social media ads, and hiring freelancers like graphic designers. Sponsorships also count unless they’re sponsoring a political candidate, party, or event.
Lobbying or expenses that are primarily personal but have some marketing value aren’t deductible. The vast majority of advertising and promotional costs do qualify for write-offs, though.
9. Business Insurance
Another often-overlooked tax write-off for small businesses is business insurance. State laws and industry standards often require some amount of insurance, so this is likely an expense you have. If these services are ordinary and necessary for your company, they are 100% deductible.
Common examples of deductible insurance include property coverage, liability coverage, employee health plans, workers’ compensation, and auto insurance for company vehicles. As cybercrime becomes more prominent, you may be able to write off data breach insurance. If you can make a reasonable argument that it’s necessary and ordinary, you can deduct it.
Your specific policy may matter, too. If the IRS deems your level of insurance coverage in an area unnecessary, they may disapprove of it. That said, most insurance premiums you pay as a small business are a likely deductible.
You may offer educational benefits to your employees to encourage professional development. If so, you can write off the costs of providing these programs and resources. Employers spend $1,308 per employee on average on learning and development so that these deductions can be substantial.
Deductible educational expenses include classes and workshops, seminars, and professional publication subscriptions. If you cover the cost of transportation to and from classes, those costs are also deductible. Keep in mind that all of this refers to continued professional development programs, and not minimum education requirements.
To qualify for this deduction, your employee education costs must maintain or improve required skills in your business. Courses that aren’t relevant or that would qualify employees for a different career aren’t eligible.
Make the Most of Your Taxes This Year
No matter what your company’s budget looks like, you can find areas to write off for your 2021 taxes. When you’re itemizing your deductions later this year, look for these 10 opportunities to save money. You likely qualify for more write-offs than you realize.