Tax Deduction Tips for Small Businesses
Last month, we talked about how to prepare for tax season. Covid has created a whole new set of self-employed people in the previous two years. If you’re one of the 16 million workers who identify as self-employed, here are our tax deduction tips for small businesses to help you navigate ﬁling your 2021 return.
If you worked from home in 2021 don’t miss these potential tax deduction tips.
If you work from your home or use part of it in your business, consider the self-employment tax deduction, as it could get you a break on the cost of keeping the lights on.
You can deduct a portion of your mortgage or rent; property taxes; the cost of utilities, repairs, and maintenance; and similar expenses. Generally, this deduction is only available to the self-employed; employees typically cannot take the home oﬃce deduction even during covid work-at-home restrictions.
On your tax return, it’s easiest to choose the simpliﬁed option, which lets you deduct $5 per square foot of home used for business, up to 300 square feet — that’s about a 17-by-17-foot space.
Make the most of your health insurance expenses.
You might qualify for a self-employment tax deduction on the premiums limited to expenses that exceed 7.5% of your adjusted gross income.
Continuing your education can pay off.
Continuing education is well worth the cost to stay up to date with technology, any new laws, and a changing world. Many professions require a certain number of continuing education hours to maintain a professional license. Qualifying work-related education costs include tuition, books, supplies, lab fees, transportation to and from classes, and related expenses. The American Opportunity Tax Credit or the Lifetime Learning Credit may also apply for a small business-related tax deduction.
Drive tax deductions with your vehicle.
It’s a good practice to keep a mileage log if you want to deduct vehicle expenses. In 2021, the IRS’ standard mileage rate was 56 cents per mile. If you use ﬁve or more cars in your business, deduct depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs, and tires.
Saving for retirement has tax benefits, too.
What’s the diﬀerence between a Roth IRA and a Traditional IRA when it comes to your retirement savings? Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable. On the other hand, contributions to Roth IRAs are not tax-deductible, but withdrawals are tax-free when you reach age 59½ or later (after you reach age 72). Popular Bank oﬀers both Roth and Traditional IRAs to meet your retirement and tax strategy needs.
Self-employment tax deductions help small businesses.
You can deduct half of your self-employment tax on your income taxes. The self-employment tax rate is 15.3% of net earnings. That rate is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings. It’s important to note that self-employment tax is not the same as income tax.
Business insurance premiums also count.
These tax deductions for small businesses include premiums for business insurance, employee accidents, and employee health insurance. Popular Bank’s small business specialists can help you determine what small business ﬁnancial products and strategies can work best for you.
Oﬃce supplies, advertising, internet, and phone.
Everyday items such as pens, staples, paper, and postage can be deducted. Additionally, the general rule for computers or special equipment is that you can deduct these items in the year you buy them if their useful lives are a year or less. Otherwise, the cost can be depreciated.
Another tax deduction for small businesses is deducting your entire phone bill if you have a dedicated business cell phone or internet connection – or the business portion of your account if it is not a dedicated line.
Credit card, loan interest, and banking expenses.
The law allows you to deduct interest accrued on business expenses purchases as a small business owner. The best way to keep track of strictly business expenses is to have business-only credit cards, as well as business checking and business savings accounts. This way, you don’t risk the possibility of mixing your personal ﬁnancial accounts with your business accounts. And should you ever be audited, it’s simple to prove that your small business tax deductions were legit.
Join the club by deducting professional memberships.
Professional organizations are great places to expand your business knowledge, learn new skills, and network with your peers. If you belong to a professional organization, you may deduct the membership fee.
Popular Bank can help your small business grow and thrive, from business ﬁnancing options to merchant services and beyond. Contact a business banker today to learn how we can help you.