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Small Business Tax Deductions & Credits That You Might Be Missing

By January 13, 2021 No Comments

Many businesses miss out on a reduced tax bill because they don’t know what small business tax deductions and credits are available to them. We hate to see founders and business owners leave money on the table because we know how hard they’re working for every dollar. As we prepare for another tax season that’s quickly approaching, here’s what you need to know to make sure you don’t miss an important small business tax break:

Tax Credit vs. Tax Deduction

First, let’s break down the differences between a tax deduction and a tax credit. While both can help reduce your tax bill significantly, they each work a little differently. A tax credit is an incentive that’s subtracted directly from the taxes that you owe. For example, if you qualify for a tax credit of $2,000 and have a tax bill of $4,000, that credit lowers your total to $2,000. Unlike a credit, tax deductions reduce the amount of your income subject to taxes, which lowers your overall tax expense liability by the amount of the deduction multiplied by your marginal tax rate.

Now that we’ve gotten that out the way, let’s take a look at ten tax deductions and credits that can weaken the blow of tax season.

Small Business Tax Deductions

1. Meal Expenses

Get ready for tax whiplash when we talk about meals deductibility. 

For the 2020 tax year – Meals are deductible at 50 percent. There are some exceptions to this deduction including meals that are provided to employees, which are 100 percent deductible.

For the 2021 and 2022 tax years – The Consolidated Appropriations Act increased the meals deduction to 100 percent.

2. Advertising Expenses

These costs are 100 percent deductible and include newspaper, magazine, online, and TV advertisements. This category also covers online (SEO, newsletter) and direct marketing efforts, public relations, and the costs of brochures and business cards.

3. Travel Expenses

The IRS defines these expenses as ones that are ordinary and necessary when traveling away from home for business. This includes but is not limited to transportation, lodging, meals, parking, and toll fees.

4. Office Supplies and Expenses

Office supplies include the usual tangible items like ink cartridges, cleaning supplies, pens, paper clips, staplers, paper, and furniture.

Office expenses are the expenses associated with running your office. This includes software and hardware, electronics, apps, website services, and domain names and hosting. Keep in mind that if an office expenditure exceeds $2,500, it might have to be capitalized as a depreciable asset.

5. Education Expenses

These benefits include reading and reference materials, courses, and workshops that help maintain or enhance your job skills or are mandatory to work in your profession. Some examples are online courses, seminars, conferences, ebooks, audiobooks, and magazine or newspaper subscriptions. If the education costs qualify you for a new career or take you outside of your current business, you are not eligible for this deduction.

Small Business Tax Credits

1. Research and Development Tax Credit

While this credit has been around for years, many businesses don’t realize that they can qualify for this credit. You may be eligible for this credit if you’ve conducted research for the development and improvement of products or improved your business performance.

2. Work Opportunity Tax Credit (WOTC)

This is a federal tax credit for employers who hire individuals from groups that typically face issues with finding employment. These new employees include veterans, ex felons, SNAP, TANF, and SSI recipients.

3. Family Leave Tax Credit

Employers who provide their employees with paid family and medical leave may qualify for this credit. This credit does not apply if the FMLA leave is mandated by local or state law.

4. Business Energy Tax Investment Credit

If you’ve made changes to your business to be more energy efficient and environmentally friendly, then you might qualify for this credit. These changes include solar technologies, fuel cells, and geothermal systems.

5. Small Business Health Care Tax Credit

To be eligible for this credit, employers must have fewer than 25 full-time equivalent employees who earn an average of less than $54,200 in 2019. They must also offer a qualified healthcare plan and pay at least 50 percent of the employee’s health care coverage.

It’s never too early to prepare for tax season — especially when you’re running a business. Getting ahead of the process early will save you time, money, and a lot of headaches. If you’re already dreading filing your taxes, consider offloading the work this year. Our bookkeepers can get your year-end financials in order while our CPAs will ensure you’re staying compliant and getting as much money back as possible. And you? You can sit back and relax knowing that it’s all being taken care of accurately and on time.

Still have lingering questions? We’re happy to answer them!