Guest article by Ursula Garrett of Garrett & Associates, CPA
One thing you can expect from me come rain or shine is to keep you in the loop on changes to all things tax-related. This week is no exception.
There are some important changes to small business tax deductions rolling out.
But first, let’s briefly talk 2021 Infrastructure bill. While the bill is getting some serious push and pull in the House, there are conflicting views on how this will affect small businesses.
Per the Treasury, the bill will target tax increases on big corporations (raising the corporate income tax — i.e. C-corps — to 28%, among other moves) while protecting the majority of small businesses (around 97%). But opposing sources argue that this doesn’t take into account the many small C corporations that could possibly be affected by the proposed corporate tax rate increase. In fact, according to the Tax Foundation “more than half of the pass-through business income could face tax increases.”
There’s certainly more to come on this, and we’ll keep you posted as lawmakers reach a final decision.
Now, even if we can’t stop a possible tax increase, we can help you with your small business tax deductions.
Let’s jump into the most recent updates…
Do your friends ever say that you’re lucky because you’ve got a business and can deduct everything on your taxes? Maybe you should get new friends… just kidding (sort of).
But there’s no “maybe” when you’re watching how to take tax deductions for your small business. The rules keep changing.
What’s in a deduction?
Though the tax reform of 2017 did away with a lot of deductions for individual taxpayers (at least for now), businesses still have a bit more leeway.
Hundreds of deductions remain available to business owners (generally speaking), including complex ones of depreciation — which we won’t get into this time. Some small business tax deductions are infamous and fancy, like the “Hummer Loophole” where some business owners can successfully write off the entire purchase price of heavy SUVs.
By no means are all deductions available to all businesses. So, let’s simplify the discussion here. Experts say small businesses are best off trying to use about six to ten strategies for taking tax deductions.
First off (and most importantly), plan ahead. If you show up with the shoebox of receipts at the last minute and expect us (or any tax preparer, we warn you) to pull some magic deductions out of a hat… well, that’s not gonna work. Making deductions stick with the IRS takes time and work – especially when keeping records to back up your deductions.
Some common small business tax deductions include office expenses (which we’ll discuss in a minute), cell phone expenses, and personal car mileage. These deductions are pro-rated between personal and business use – and again, we want to emphasize to business owners: document document document.
Let’s look at those decades-old dependable biz deductions: meals and entertainment (M&E, aka wining and dining). For ages, it was assumed you could write off the whole cost of a steak dinner or even a ball game if you just took a business “associate” and mentioned business once or twice. Well, no more.
Now, the rule is a “business associate” that ignites this whole deduction has to be someone you “reasonably” expect to do business with.
The federal M&E deduction (claims for which still keep the tax courts mighty busy) recently became a little confusing. Rule-makers tried saying that meals were okay to deduct but not entertainment, leading many biz taxpayers to wonder how exactly you separate the two.
Right now, business meals from a restaurant are 100% deductible through next year; the deductible percentage is expected to plunge again after that. The food you buy during an entertainment activity is also a separate deduction from the entertainment itself.
Entertainment expenses are no longer deductible. Entertainment, according to the IRS, is “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation,” listing as examples “entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips.”
Sometimes the wording of deduction rules is open to a little (or a lot of) interpretation. Did we mention tax courts?
Home and away
Let’s wrap up with two other common small business tax deductions.
Home office: As more and more people are enjoying the beauty of working from home, this is one deduction that will require a little more pondering. A regular employee can’t take a deduction for the workspace. But you as a business owner or independent contractor might be able to deduct office expenses.
If you’re self-employed, you have a few more options – but with the caveats that the space is your main place of business and that it is used exclusively for that purpose. Examples of allowable deductions: repairs and maintenance to the area used for business; utilities; real estate taxes; insurance; and home mortgage interest.
The easy way to calculate your deduction is to basically take the square footage of your home office (up to 300 square feet) and multiply it by five dollars. The more complex method is finding out what percentage of your home’s square footage constitutes your home office and then pro-rate certain “direct” and “indirect” expenses. Make sure to check in with us (or the IRS) about these terms.
Travel: The IRS considers a business day to be eight hours. For a 100% travel deduction for an entire day, at least half that time must be spent on a work-related activity.
Note: Traveling from one destination to another is considered a work-related activity by the IRS. Spend four hours getting somewhere for a business meeting and you’ve qualified.
Deducting your meals when you travel for business depends on how far you travel and if it seems, you have to sleep during the trip (no, naps don’t count). Save every receipt and log when, where, and even what you ate. Then, write that info right on the receipt at the time you incur the expense.
Originally published at https://cpagarrett.com on August 25, 2021.
Business advisor Ursula Garrett helps entrepreneurs build empires one asset at a time. Qualified as a Certified Public Accountant (CPA), her particular expertise is with entrepreneurs and small businesses, with a focus on new business startups. Ursula also holds an MBA in Entrepreneurship, is an international speaker and an award winning author of two books. A lifelong pursuit of excellence in business allows Ursula the privilege of offering 20+ years of experience to clients as a practicing CPA, specializing in business advisory, tax services and entrepreneurial training.