If 2020 proved anything, it was that life can not only be unpredictable, but everything can change at the drop of a hat. However, just because the IRS pushed back the filing deadline to July of this year doesn’t mean that’s going to be the status quo. In fact, we’re going back to the April 15 deadline in 2021.
While that may seem like an eternity away. The fact of the matter is that April will be here before you know. So, if you don’t want to frantically file at the last minute, you need to start preparing your taxes now.
The thing is if you took out a PPP loan, that will most likely have an effect. The good news, however, is if you used these funds for approved expenses like rent, mortgage, or payroll, you don’t have to worry about paying tax on them.
At the same time, this may impact your deductions on your business taxes this year.
“This notice provides guidance regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.”
What to expect when you file your business taxes in 2021?
What’s that all mean? Deanna deBara breaks it down in post over at Biz2Credit.
“Essentially, this prevents businesses from receiving a double tax credit by excluding a forgiven PPP loan from their taxable income and claiming the expenses they used the PPP funds for as tax deductions,” explains deBara. Simply put, if you used PPP funds to handle your expenses, then they’re “ineligible to be claimed as a tax deduction.”
“So, let’s say you received a $250,000 Paycheck Protection Loan—and you spent 100% of the loan proceeds on approved expenses, which qualified you for loan forgiveness,” she continues.
“When it’s time to file your taxes, you won’t include that $250,000 in your taxable income.” What’s more, “you also can’t claim any of the tax deductions that would typically apply to the expenses you used PPP funds more—which means that, while you don’t have to claim the $250,000 loan amount as taxable income, you also don’t get to claim any related tax deductions you might have otherwise benefitted from had you used your own funds to cover those expenses.”
As a result, that may influence the following tax deductions:
- Interest deductions. Generally, you’re permitted to deduct the mortgage interest in your taxes if it’s tied to your business. But, not if you used PPP funds.
- Rent. You’re also not allowed to take a rent tax deduction if you used your Paycheck Protection Program loan to cover rent.
- Utility payments. Electricity, interest, and water expenses related to your business are fair game. But, as you guessed, not if you used PPP funds to pay these bills.
- Payroll taxes. “The Paycheck Protection Program allows recipients to defer a portion of their payroll taxes through the end of 2021,” writes deBara. “But if you defer, that’s also not a deduction you’ll be able to take.”
What other tax implications will there be for business?
In addition to PPP loans, the CARES Act included several tax credits and changes. These include:
- Your business could meet the requirements for the new Employee Retention Tax Credit. If so, this is a 50% tax credit for the first $10,000 of compensation for each eligible employee.
- Businesses and self-employed individuals can delay the employer portion of federal payroll tax payments. That means that the Social Security tax owed for 2020 can be deferred and paid over the next two years.
- Were you supposed to receive a corporate alternative minimum tax (AMT) credit at the end of 2021? If yes, you can claim a refund immediately.
- Businesses are able to increase business interest expense deductions on tax returns. So, for 2019 and 2020, the amount of interest expenses businesses can deduct on their has increased to 50% — it was previously 30% of taxable income.
- Businesses, especially those in the hospitality industry, are permitted to write off any costs associated with improving facilities immediately.
That’s a lot to take in. So, I strongly recommend you work with a tax expert who can guide you in the changes mentioned above. They can also help you write off a number of other business expenses so that you’ll owe less on your income tax. Considering the type of year this was, I think all business owners could use any financial assistance they can get.
To give yourself a head start though, here are 21 business deductions that you should have a dib on.
1. Advertising and promotion.
Let’s kick things off with perhaps one of the most generous tax deductions. You can fully deduct all expenses that involve promoting your business. Everything from business cards, website design, and both digital and print advertising are suitable.
2. Business interest and bank fees.
Any interest that you’ve had to pay on business loans or business credit cards can be deducted. Additionally, you can also write off additional charges, such as monthly service fees or annual credit card fees.
3. Business travel.
You probably didn’t do much traveling this year. But, if you did, you can write off most business travel expenses. These include airfare, car rentals, lodging, meals, and even dry cleaning. To avoid any problems with the IRS, there are certain requirements. For instance, the trip had to be necessary, was in a different area, and was longer than a normal workday.
4. Car use.
If you only use your vehicle for work, then you can fully deduct whatever you spent to operate and maintain your vehicle. What if you use it for both work and personal use? You can claim the miles that were business-related. In 2020, the standard mileage rate was 57.5 cents for every mile.
5. Charitable contributions.
As long as you set up as a sole proprietorship, LLC, or partnership, you can absolutely claim any charitable donations that you’ve made to qualified organizations. However, thanks to the CARES Act, there will be a temporary increase.
As stated by the IRS:
“The amount of charitable contributions of food inventory a business taxpayer can deduct under this rule is limited to a percentage (usually 15 percent) of the taxpayer’s aggregate net income or taxable income. For contributions of food inventory in 2020, business taxpayers may deduct qualified contributions of up to 25 percent of their aggregate net income from all trades or businesses from which the contributions were made or up to 25 percent of their taxable income.”
6. Child care.
If you’re a parent and your children are twelve years of age or younger, then childcare is tax-deductible. Also, if you pay for your employee’s child care expenses you’re likely to claim 10-25% of this expense.
Additionally, if your spouse or another adult family member requires care you can also write off these costs.
Did you purchase a large asset like a piece of equipment or a commercial vehicle? If so, you can deduct the total cost. However, you wouldn’t do this in a single tax year. Instead, you write off pieces over time.
Depreciation can get a little tricky. But, for 2020, the IRS states that “the maximum section 179 expense deduction is $1,040,000 ($1,075,000 for qualified enterprise zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,590,000.Also, the maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2020 is $25,900.”
8. Home office expenses.
Since you probably spent the majority of the year working from home, this is a deduction that should be on your radar. The IRS states that you can claim “$5 a square foot for up to 300 square feet.” Thankfully, the IRS created a simplified option to make calculating this figure much easier.
9. Energy efficiency expenses.
Did you decide to be more eco-friendly this year? Then you may qualify for energy incentives if you installed “solar electric property, solar water heaters, geothermal heat pumps, small wind turbines, and fuel cell property.” Here is a useful guide to know how much you’ll be getting back for your solar credit.
10. Medical expenses.
Both insurance premiums and medical care expenses are fair game — if you have more than 25-full time employees. What if you’re self-employed? You should be able to deduct your health and dental care insurance premiums.
11. Mortgage interest paid.
If you own property, then you can deduct the interest you paid on your mortgage. It’s also acceptable to deduct any construction or improvements that were made.
12. Net operating loss.
If your business had a net operating loss (NOL), some limitations may be relaxed. As explained by Stephen Fishman, a self-employed tax expert, the “CARES Act allows you to use NOLs occurring during 2018, 2019, and 2020 to offset 100 percent of the income you earned during those years. Thus, if you have an NOL, you won’t have to pay any taxes for these years. “
13. Office supplies.
Office materials like pens, paper, and printer cartridges can also be deducted. The same goes for any hardware, software, or online services you spent on your business. For example, your accounting software would be in line for a write-off.
14. Professional services.
Did you hire an accountant, bookkeeper, or lawyer? These are just a couple of professional services that can be claimed. If you are uncertain what classifies as a professional service expense, review the guidelines set by the IRS.
15. Real estate taxes.
“State and local property taxes are generally eligible to be deducted from a property owner’s federal income taxes, creating the property tax deduction,” explains Julia Kagan over at Investopedia. “Deductible real estate taxes include any state, local, or foreign taxes that are levied for the general public welfare.” Just note, that any taxes changed for renovations or services like trash collection do not count.
As of 2018, “the deduction for state and local taxes, including property taxes, was capped at a total of $10,000 ($5,000 if married filing separately),” adds Kagan.
16. Retirement contributions.
Did you contribute to an IRA? Well, give yourself a well-deserved pat on the back. And, then go ahead and deduct these amounts — as long as they don’t exceed the total income you earned or the annual maximum contribution. Also, retirement contributions can be found on Form 1040.
17. Startup expenses.
If you launched a new business this year, then you can deduct your startup expenses. These include everything from business, licenses, permits, marketing, training, and traveling to find suppliers, distributors, and customers. Just note that you can deduct as $5,000 or more if you provide detailed itemization.
18. Salaries and benefits.
Whatever employee wages, payroll taxes, reimbursements, or benefits that you made throughout the year can be claimed.
Hopefully, you spent some of your spare time this year enhancing your skills and knowledge. If that included workshops, seminars, classes, or anything else that improved your business savvy then these costs are deductible. Even relevant books and magazine subscriptions could qualify.
What if you don’t have full-time employees and have hired freelancers or independent contractors? Good news! These expenses are also deductible.
Portions of your gas, water, and electricity bills can all be claimed. The same is true with internet and phone expenses — both landline and mobile. You might even be able to write off trash removal.
Final words of advice.
Because tax deductions change from year-to-year, it’s in your best interest to hire an accountant who is up-to-speed. They can also let you know what qualifies as an expense and what isn’t. After all, the last thing you want is to get penalized by the IRS. More importantly, they’ll make sure that you aren’t missing out on a potential deduction or credit.
What’s more, make it a point to keep your personal and business expenses separate. And, to avoid going into unnecessary debt, don’t incur expenses just for the sake of claiming it. That just doesn’t make financial sense.