7 Business Tax Deductions That Might Surprise You
Since we are wholeheartedly barrelling toward the end of 2020 and the start of 2021, it’s time to think about taxes. When you own a small business, it can feel as if taxes have only one purpose: to rapidly drain your bank account. However, there are plenty of business tax deductions that will reduce your taxable income and lessen the sting.
At Fisher Bookkeeping, our goal is to help you manage your company’s financial health. We work with businesses in all stages, from start-ups to those scaling and growing. If you’re interested in finding out what outsourced bookkeeping could look like for you, let’s talk.
And if you want to learn about how the Profit First model can help you plan for your tax bill painlessly, we can help with that, too. You will love the freedom that comes with the Profit First system.
Tax Deductions vs. Tax Credits
For the average person, all of the various tax jargon can sound the same. Many people use the terms tax credits, deductions, write-offs, and breaks interchangeably.
In actuality, though, deductions and credits are two different things that behave similarly.
- Tax credits reduce your tax liability dollar for dollar. That is, if you owe $2000 but qualify for a $1000 tax credit, then you will owe $1000. Credits are either refundable or non-refundable. The former indicates that if the credit exceeds your liability, you end up with a refund. The latter means that you would not get money back for the excess. The Child Tax Credit is an example of a tax credit.
- Tax deductions also save you money on your tax bill, but in a different way. Deductions lower the amount of taxable income you have, which, in turn, helps reduce your tax liability. So, if you are in the 25% tax bracket, for example, a $1000 deduction lowers your tax bill by about $250. Actual amounts depend on your tax bracket and other deductions. Vehicle and home office expenses are examples of possible deductions.
Clearly, tax credits are fabulous because they can significantly reduce your tax burden. But they are also harder to come by for that very reason. Be sure to talk with your tax planner about any credits you might be eligible to claim.
Business Tax Deductions You Won’t Want to Miss
Most business owners are eligible for several different deductions on their tax returns. But many also miss a lot of opportunities to reduce their tax bill.
Always check with your CPA about credits and deductions to ensure nothing has changed in the ever-evolving tax law. Different options apply depending on how you operate, such as under an LLC or S Corp. With that in mind, here are seven business tax deductions that often go overlooked.
1. Yard Work
Businesses that own a brick-and-mortar location probably already claim landscaping maintenance. But if you run a home-based business, you may be able to write off a portion of your lawn care as a business expense.
If your home is the primary place where you see clients or customers, yard work expenses could be a legitimate deduction. Keep your invoices and receipts and check with your accountant to see if you qualify to claim this tax break.
2. Fluffy and Fido
In some instances, the care and maintenance of a pet can count as a deduction. A business that relies on a dog for security purposes may be able to write off a portion of the animal’s care. Similarly, an agribusiness that uses cats to manage the rodent population could possibly claim a deduction for a percentage of their food and vet bills.
3. Renting Your Home for Meetings
In many situations, you can rent your home to your business for work-related meetings and training. The company would pay a fair-market rental fee to you as an individual. You can generally do this for up to 14 days in a calendar year without having to claim the income on your taxes.
There are specific guidelines for doing this legally. Make sure you discuss the parameters with your tax planner.
4. Renting Your Home Office
In 2020, working from home has been the name of the game. The arrival of COVID-19 brought a global shutdown that sent many employees and business owners into a work-from-home situation. Whether you were already doing this or it’s new for you, be sure you don’t miss the opportunity to deduct your home office expenses.
You can do this one of two ways:
- Determine what a comparable rent would be elsewhere for your square footage. The business can then pay you that monthly amount. This option is the simplest.
- Based on your office’s square footage, you can deduct a percentage of your housing and utility costs. This method is more complicated but can yield a higher benefit. Work with your CPA to determine the right choice for your situation.
5. Hiring Your Children
There are significant tax benefits to hiring your minor children to work for your sole proprietorship. The wages you pay your child under age 18 are not subject to Medicare and social security taxes. This fact has the potential to save you a lot of money.
In addition, minors can earn up to $12,400 before having to file a tax return, giving them “tax-free” money. PRO TIP: If they invest some of that in a Roth IRA, they do not have to pay taxes when they withdraw the money after a certain period.
Not every business can take advantage of the tax benefits of hiring the owner’s children. Sole proprietorships or partnerships in which both partners are the parents generally can do so.
6. Streaming Services
Do you own a brick-and-mortar that has music playing in the background? Or do you have a kids’ area in your store with cartoons showing on a television? If so, you can likely deduct the cost of music or video streaming services. Popular options such as Spotify and Netflix may be “reasonable” expenses for your business.
7. Ransom
You read that right! Hollywood blockbusters aren’t the only place where ransom demands happen. More and more frequently, cybercriminals are holding business data hostage and demanding a ransom. They threaten to delete or corrupt your data if you don’t pay.
If you do pay a ransom, that amount may qualify as one of your business tax deductions. You must file a police report and meet other criteria to claim this. Of course, let’s hope you never need to take this deduction. But cyber threats are becoming more common, prompting many business owners to purchase cyber liability insurance.
Ready for Help?
Managing your company’s financials can feel like a full-time job. If you are ready to have expert support in this area, contact Fisher Bookkeeping today.
Our team works to help you set up, clean up, catch up, and keep up your company’s books. With optimized workflows and timely reports, we help you stay on top of your business finances so that your bottom line can grow.
And we help make sure you are ready to meet with your CPA at tax time. You will have the information you need as you work with them to find deductions and credits to keep more money in your pocket. Let’s get started today.
About the Author Barb Fisher
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).