Every small business owner wants to save money — and small business tax deductions are one way to do exactly that.
We understand that tax time can be time-consuming for small business owners, and 2020 brought unique challenges. The good news is, we’ve already done a lot of the research for you.
What’s New for Filing 2020 Taxes
Many federal COVID-19 pandemic relief funds are tax deductible, but only under certain circumstances or conditions. Here’s a brief rundown of what’s changed:
The Coronavirus Aid, Relief, and Economic Security (CARES) Act. If your business received money from the Paycheck Protection Program (PPP) that was forgiven, that money is not taxable. However, if any amount was not forgiven, it’s considered taxable income for 2020.
In addition to PPP loans, the CARES Act introduced several other major changes, which are as follows:
- Businesses can now delay the employer portion of federal payroll tax payments. Translation: your Social Security tax for 2020 can now be paid over the next two years instead of this year.
- Businesses can write off expenses related to making their facilities COVID-safe.
- If you’re expecting to get a corporate alternative minimum tax credit at the end of 2021, you can claim a refund ASAP.
- Businesses can increase their interest expense deductions on tax returns. The amount of interest you can deduct for 2020 is 50% (up from 30%).
Economic Injury Disaster Loan (EIDL). Did your business receive EIDL funding? If so, you will be required to pay income taxes on the loan.
Employee Retention Tax Credit (ERTC). You may qualify for this tax credit if your business was closed (fully or partially) during a COVID-19 shutdown. Check the IRS website to see if your business is eligible.
Families First Coronavirus Response Act (FFCRA). If you provided sick or family leave to your employees that were affected by COVID, you’re eligible for tax credits for 100% of the cost of that sick pay. Under FFCRA, you can also get credits for your employees’ healthcare plan expenses and other sick-leave expenses.
2020 was an unusual year, and filing taxes will most likely be different than in years past. To make sure your business can accurately account for these changes on your 2020 returns , we strongly recommend working with a tax professional. They can also help you write off any of the expenses below that apply.
The Ultimate List of Small Business Tax Deductions
1. Vehicle Expenses.
Keep records during the year to prove the use of your car, truck or van, for business, especially if you also use the vehicle for personal reasons. When it’s time to pay taxes, you can choose to deduct your actual expenses (including gasoline, maintenance, parking, and tolls), or you can take the more straightforward route of using the IRS standard mileage rate — 57.5 cents per mile in 2020.
Whether you’re running errands in your own car or making deliveries in your bakery van, track the mileage and run some numbers to see which method gives you the higher deduction. If you drive a lot of miles each year, it makes more sense to use the standard mileage deduction when filing taxes. However, if you have an older vehicle that regularly needs maintenance, or isn’t fuel efficient, you might be able to get a larger deduction by using your actual expenses vs. the IRS mileage rate.
Either way, We all know that gas, repairs, parking, and mileage add up, so taking advantage of the standard mileage rate, or deducting your actual expenses, is a no-brainer way to put some of that money back in your pocket. Just make sure you keep records diligently to avoid mixing personal expenses with business ones.
2. Home Office.
Do you run part of your small business out of your home, maybe doing the books in the evenings after you’ve parked your food truck for the night? Or perhaps you run an entirely home-based business. For many self-employed individuals and sole proprietors, it’s pretty standard to have a space at home that’s devoted to your work. The key here is the word devoted. Sometimes doing work at the kitchen table while your kids do their homework doesn’t count as a home office. You must have a specific room that’s dedicated to being your office in order for it to be tax deductible.
Calculating the size of your deduction is primarily related to the amount of your home that’s used as an office. For example:
Total square footage of your home / divided square footage used as an office = the percentage of direct and indirect expenses (rent, utilities, insurance, repairs, etc.) that can be deducted.
We highly recommend that you read the IRS’ guidance on this deduction, and/or speak with a tax professional before filing taxes with this deduction. It’s one of the more complicated ones available to small business owners. When dealing with the potential for a costly audit, it pays to be safe by consulting a professional tax preparer.
3. Bonus Depreciation.
If you buy new capital equipment, such as a new oven for your pizzeria, you get a depreciation tax break that lets you deduct 100 percent of your costs upon purchase. Under the Tax Cuts and Jobs Act, depreciation only pertains to equipment purchased and in use between September 27, 2017 and January 1, 2023 — something to keep in mind as you plan for new equipment purchases in the next few years.
It’s important to note that according to the IRS, the asset you purchase must meet the following three requirements:
- It must be used in the business or held to produce income during the year of purchase.
- The useful life of the asset must be greater than one year.
- It must be an asset that wears out, gets used up, or loses its value over time.
A few things that don’t count as assets include:
- Air conditioning or heating units.
You also can not deduct an amount that’s greater than your net taxable income.
4. Professional Services.
As a small business, you probably don’t have in-house accountants or attorneys, but that doesn’t mean you can’t deduct their services. If you hire a consultant to help you grow your store’s outreach, the fees and overall expenses you pay for those services are deductible. Make sure the fees you’re paying are reasonable and necessary for the deduction to count by checking with the appropriate IRS publication or a tax professional. But, you’d do that anyway, wouldn’t you?
5. Salaries and Wages.
If you’re a sole proprietor or your company is an LLC, you may not be able to deduct draws and income that you take from your business. However, salaries and wages that you pay to those faithful part-time and full-time employees behind the cash register are indeed deductible.
However, this doesn’t just stop at standard salaries and wages. Other payments like bonuses, meals, lodging, per diem, allowances, and some employer-paid taxes.
6. Work Opportunity Tax Credit.
Did you hire military veterans or other long-term unemployed people before January 1st, 2021? If so, you may be eligible to take advantage of the Work Opportunity Tax Credit. Check this article for more information.
7. Office Supplies and Expenses.
Even if your business doesn’t have a traditional office, you can still deduct conventional business supplies and office expenses, as long as they are used within the year they’re purchased, so set up a file for your receipts. Many times you can also deduct the cost of postage, shipping, and delivery services so if mail-order is a part of your business, be sure to keep track of this cost.
8. Client and Employee Entertainment.
Yes, you can take small business deductions for schmoozing your clients, as long as you do indeed discuss business with them, and as long as the meal occurs in a business setting and for business purposes. In some cases, you can’t deduct the full amount of your entertainment expenses, but every bit helps.
Here are some tips to guide when and what you can deduct:
- For client meals and entertainment, you can typically deduct up to 50% of the cost provided that at least one employee was present and the meal was not lavish.
- You can also deduct office meals and snacks.
9. Freelance/Independent Contractor Labor.
If you bring in independent contractors to keep your checkout lines moving during the holidays or to create new marketing materials for your shop, you can deduct your costs. Make sure you issue Form 1099-MISC to anyone who earned $600 or more from you during the tax year.
10. Furniture and Equipment.
Did you buy new chairs for your eat-in bakery or new juicing blenders for your juice bar this year? You have a choice regarding how you take your small business tax deduction for furniture and equipment. You can either deduct the entire cost for the tax year in which it was purchased, or you can depreciate the purchases. The IRS has specific regulations that govern your choices here, so make sure you’re following the rules and make the right choice between depreciation and full deduction.
11. Employee Benefits.
The benefits that businesses like yours offer to employees do more than attract high-quality talent to your team. They also have tax benefits. Keep track of all contributions you make to your employees’ health plans, life insurance, pensions, profit-sharing, education reimbursement programs, and more. They’re all tax-deductible.
12. Computer Software.
You can deduct the full cost of business software as a small business tax deduction if you purchased it during the year you’re filing for. This includes your POS software and all software you use to run your business.
13. Rent on Your Business Location.
You undoubtedly pay rent for your store’s physical space. Make sure you deduct it.
14. Startup Expenses.
If you’ve just opened your gift shop or convenience store, you may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you opened your doors for business. These can include marketing and advertising costs, hiring costs, and the cost of setting up a legal entity.
Don’t miss the small business tax deductions for your electricity, cell phone, and other utilities.
Deducting taxes is a little tricky because the small business deduction depends on the type of tax. Deduct all licenses taxes, as well as taxes on any real estate your business owns. You should also deduct all sales taxes on purchases you made for your business. If you have employees, you can deduct the business portion of your payroll taxes.
If you have salespeople working on commission, those payments are tax-deductible. See this article for more details on how to do so.
18. Machinery and Equipment Rental.
Sometimes, renting equipment for your coffee shop or concession stand is great for your bottom line, since you can deduct these business expenses in the year they occur with no depreciation.
19. Interest on Loans.
If you take out a business line of credit, the interest you pay is deductible as a small business tax deduction. If you take out a personal loan and funnel some of the proceeds into your business, however, the tax application becomes somewhat more complicated.
20. Bad Debts.
Did you advance money to an employee or vendor, and then not receive repayment or the goods or services you thought you were contracting for? If so, you may be able to treat this bad business debt as a small business deduction.
21. Mortgage Interest.
If your business owns its own building, even if it’s just a hot dog stand, you can deduct all your mortgage interest. If you conduct business from home, you may also be able to deduct part of your mortgage interest relative to the size of your home office.
22. Bank Charges.
Don’t forget to deduct the fees your bank charges you for your business accounts, like annual service or credit card fees.
23. Disaster and Theft Losses.
If your business is unfortunate enough to suffer theft or to be the victim of a natural disaster during the year, you may be able to turn any losses that your insurance company didn’t reimburse into a small business tax deduction.
24. Carryovers From Previous Years.
Some small business tax deductions carry over from year to year. For instance, if you had a capital loss in a previous year, you may be able to take it in the current year. Specifics often change from year to year, to make sure you’re up to date on the latest IRS regulations.
25. Business Insurance.
Some of the insurance premiums you pay for coverage on your business is tax-deductible. This could include coverage for:
- Employee theft
- Business-owned vehicles
There are a few insurance types that you can’t deduct. If you’re not sure whether you can deduct a certain type of insurance, and that deduction is an important factor in your decision, speak with a tax professional.
26. Home Renovations and Insurance.
Did you take a deduction for a home office already? If so, business expenses related to any renovations to that part of your home are also deductible, and so is the percentage of your homeowner’s insurance that covers that part of your home. Remember, all small business deductions related to home offices only apply if you use part of your home exclusively for business.
The IRS distinguishes between tools and equipment. While you may have to capitalize on equipment rather than deducting it in one year, you can deduct tools that aren’t expensive or that have a life of only a year or less. And for the IRS, “tools” doesn’t just refer to hammers or screwdrivers; your spatulas and cookie sheets are tools as well.
28. Unpaid Invoices.
If your business provides a service or used invoices to charge for any expenses in 2020, you can deduct them if you use accrual-based accounting.
Did you attend any seminars, workshops or classes in the past year that were designed to help you improve your job skills? Your work-related educational expenses may be deductible, especially if they’re required to keep up or renew a professional license. Remember, they have to be work-related. If you own a cafe, you won’t be able to deduct skiing lessons.
30. Advertising and Marketing.
Advertising and marketing dollars can add up fast, but fortunately, they are all tax-deductible.
This is great news since advertising and marketing are often the biggest business expenses that small businesses need to deal with as they get off the ground. Rest assured, you can deduct everything from flyers to a new website. Political advertising is the biggest exception to this rule. Those expenses are not deductible.
31. Charitable Deductions.
Donations to charity were greatly needed in 2020. If your small business donated supplies, money, or property to a recognized charity, you may be able to deduct them. Check with the IRS before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.
32. Cleaning and Janitorial Expenses.
Keeping your business clean and your employees safe was more crucial last year than ever before. You can deduct your cleaning and PPE expenses from your taxes.
33. Intangibles like Licenses, Trademarks, and other Intellectual Property.
Expenses related to the registering or protection of intellectual property can be deductible. However, the process you go about it can differ depending on what you’re trying to deduct. Some costs must be depreciated over multiple years, while others can be fully deducted within the year in which they were incurred. We recommend working with a tax professional to ensure you’re in compliance with the regulations governing your specific situation. Check out this resource for more detailed information.
The Bottom Line
Whether you’re filing your taxes quarterly or holding off for the next annual deadline, you should begin preparing for your taxes by keeping records of your expenses as of January of each year. Make sure to document each of these small business tax deductions by keeping physical receipts and writing down the business reason for the expense on your receipts as soon as you receive it.
With this comprehensive list of small business tax deductions, you’ll be well on your way to saving on your taxes this year. However, deductions can be tricky, it’s always best to consult a tax expert for any questions that might arise to ensure you are complying with all regulation and avoid any penalties.