How Small Businesses Benefit From Unknown or Forgotten Tax Deductions & Credits
Starting and operating a small business is challenging in many ways. Unfortunately, many small business owners spend time in figuring out taxes when it would be better spent improving their products and services and working with customers. Even worse, in the hectic daily business ownership day, they often miss tax deductions or credits available to them and their business. Then they end up paying more to the IRS than necessary when they miss these money-saving opportunities.
There are a great many angles to taxes, some that may apply to you and your business and others that will not. This article will reference them with links for more information. You can get enough here to see if they may apply to you and your business and go to the link for more information.
What is New for 2021?
Before getting into forgotten and unknown deductions and credits, here are some new tax and payroll tax changes for tax year 2021i:
- Social Security wage base: the wage base increased from 2020 from $137,700 to $142,800, while the withholding rates for Social Security and Medicare.
- 2021 limits for health savings accounts (HSA) and high-deductible health plans (HDHP):
- HSA employee & employer contributions for self only = $3,600 and Family = $7,200.
- HSA Catch-up self-only = $1.400 and Family = $2,800.
- HDHP minimum deductibles for self-only = $1,400 and Family = $ 2,800.
- HDHP maximum out-of-pocket costs for self-only = $7,000 and Family = $14,400.
- Health flexible spending accounts: While the limit has not changed, the maximum carryover amount for 2021 has gone up $50 to $550.
- Standard deduction adjustments: The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from 2020. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
- COVID-19 related tax credits as updated by the IRS on January 28, 2021 (lots of info here, some changes in numbers, some in wording)ii
- When can employers start claiming credits? – Eligible Employers may claim tax credits for qualified leave wages paid to employees on leave due to paid sick leave or expanded family and medical leave for reasons related to COVID-19 taken for periods of leave beginning on April 1, 2020 and ending on March 31, 2021.
- Which employers can claim them? – Eligible Employers that are entitled to claim the refundable tax credits are businesses and tax-exempt organizations that: (1) have fewer than 500 employees, and (2) pay “qualified sick leave wages” and/or “qualified family leave wages” under the EPSLA and/or the Expanded FMLA, respectively.
- What is the amount of refundable tax credits for eligible employers? – The credits cover 100 percent of up to two weeks (up to 80 hours) of the qualified sick leave wages and up to ten weeks of the qualified family leave wages (and any qualified health plan expenses allocable to those wages) that an Eligible Employer paid during a calendar quarter, plus the amount of the Eligible Employer’s share of Medicare tax imposed on those wages.
- What is the eligible employer’s share of Medicare tax on qualified leave wages? – The FFCRA adds to the tax credits the amount of the Hospital Insurance tax, also known as Medicare tax, that Eligible Employers are required to pay on qualified leave wages. The rate for this tax is 1.45 percent of wages.
There is a lot of detail involved in these, as after all, it is the IRS. So, go to the reference link for more info.
Little Known or Forgotten Tax Deductions for Business
There should be a few here that you may have missed before or should know about going into this new tax year. If not, congratulate yourself on being a tax-savvy business owneriii.
- Home office deduction – Do not forget that you can use the simplified method without having to document all kinds of expense disbursements. For a qualified home office, you can deduct $5 per square foot of the business space up to $1,500.
- Guard dogs – If you have a dog on your business premises that is there to protect your business property or merchandise, you have some deductions you can take. However, this cannot be for a personal pet you take to work. For a qualified guard dog, you can deduct:
- Veterinary care
- Adoption fees
- Music equipment and services – If you use music for your employees or customers in your business, you may be able to deduct the cost of the equipment and for services such as Pandora, Muzak, or Spotify.
- Contest prizes – If your cost exceeds $600 in fair market value for prizes you give in contests promoting your business, you can deduct them with Form 1099-MISC.
- Customer gifts – Gifts to customers for appreciation or promotions can be deducted up to $25 per gift. This also includes their family members if you do not have an independent business relationship with them.
- Bad debt losses – If you have business debt owed to you and have made reasonable efforts to collect that debt, you can claim it as a bad debt loss expense.
- Carryover deductions – This gives you the ability to comb your past tax records to find deductions you missed and to carry them over into the current tax year to reduce your taxes. This includes operating losses and capital losses, but there are limitations on home office expenses.
It is your money, and every dollar you can legally keep before taxes is one you can use to grow your business.
i Payroll and tax changes in 2021, SBAM.org
ii COVID related tax credits, IRS Basic FAQs
iii Lesser-known small business tax deductions, BusinessPundit.com