Small Business Tax Deductions for 2021

by?Johanna Raspolich.

Tax season feels particularly overwhelming for small business owners. Organizing a year’s worth of records and figuring out which of their expenses are deductible can be daunting.

Halting operations to research every tax-saving opportunity is not realistic – let Xendoo do it for you! In this blog post, we will share popular?small business tax?deductions that you may be able to claim for the 2021 tax year! Let’s get started.

Advertising and Marketing

Advertising and marketing costs are fully deductible, so long as they are considered reasonable, ordinary, and necessary. Examples include:

• Physical marketing materials, such as business cards, brochures, or flyers?
• Online marketing costs, such as social media campaigns and influencer marketing
• Traditional marketing costs, such as print ads, radio spots, and TV commercials
• Sponsoring events

Note: The costs of hiring professionals to design logos and websites, and even printing physical materials are also deductible. Political advertising expenses (such as lobbying or sponsoring political campaigns) are?not?deductible.?

Business Travel Expenses??

Those that travel for business purposes, such as attending conferences or traveling to meet with clients, can deduct certain travel expenses. Examples include:

• Transportation costs, such as plane, bus, or train tickets?
• Lodging costs, such as hotels or Airbnbs?
• Taxis, Ubers, Lyfts, and rental car costs
• Non-entertainment-related meals
• Tips paid for services related to any of the expenses listed above

Note: Business trips must consist of mostly business-related activities, or the IRS will consider it a vacation, and the expenses will not be deductible. Be sure to keep a record of activities to prove the trip was for business purposes. If your spouse and/or children join you on the trip, their expenses can be deducted if they are also your employees.?

Business Use of Your Car

If you use your car for business purposes, you can deduct either your mileage?or?the expenses of maintaining your vehicle. If you choose to deduct your mileage, be sure to keep a log. The mileage rate for 2021 is 56 cents per mile. The expenses of maintaining your vehicle include:

• Gas and oil?
• Repairs, maintenance, and tires??
• Registration fees, licenses, and taxes
• Vehicle insurance
• Rental or lease payments
• Tolls and parking fees
• Vehicle depreciation

Note: If your vehicle is used for both business and personal reasons, only business-related expenses can be deducted. For future reference, the mileage rate for 2022 is 58.5 cents per mile.

Continuing Education Costs

Education costs that increase your and your employee's skills and expertise are fully deductible! Examples include:

• Seminars and webinars related to your field
• Workshops and classes intended to enhance your skills?
• Subscriptions to professional publications?
• Business certifications?

Note: Any educational costs that are outside of your field, or that would qualify you or your employees for a different career cannot be deducted. Prerequisite courses needed to meet the minimum education requirement for the job are also excluded.

Home Office and Office Supplies

Many small business owners utilize a home office, which can be added to their tax deductions. There are two ways that the home office deduction can be calculated:?

• The?simplified method?is to deduct $5 per square foot of the home that is used for business purposes, up to 300 square feet maximum.?
• The?standard method?is to track all the expenses of maintaining the home, such as mortgage or rent payments, HOA fees, utilities, repairs and upkeep, and property taxes, then multiply these expenses by the percentage of the home that is used for business purposes.?

While the simplified method involves less work, it may result in a lower deduction. Consider partnering with an?online bookkeeper?to track your home office expenses each month, so you can maximize your return with minimal effort!?

Note: The home office space must be used exclusively for business purposes. A coffee table in the living room that doubles as a work desk would not qualify, because it is used for personal and business activities. The home office must be the principal place of business, meaning the business owner spends most of their time conducting business activities there. While it is not necessary to set aside an entire room for business use, there should be clear boundaries that indicate where business activities take place.?

With a home office, comes office supplies! All the supplies that are necessary to running your business can be deducted, such as:

• Paper and pens
• Postage
• Printers and ink cartridges
• Hosting fees for the business website
• Work-related software and software subscriptions?
• Cleaning supplies

Employee Salaries and Benefits

Small businesses with one or more W-2 employees can deduct employee salaries, benefits and taxes paid, and vacation pay, so long as they meet the following requirements:?

• The salaries and benefits must have been paid in the same year the deduction is being claimed.?
• The salaries and benefits must be?reasonable, ordinary, and necessary.?
• The employee cannot be the Sole Proprietor, an LLC member, or a partner.?

Contract Labor

In addition to the expenses of W-2 employees, business owners can deduct the fees associated with independent contractors and freelancers (1099 employees), as long as:

• The contractor is not also an employee of the business.
• The services provided were for business purposes only.

Note: If you pay independent contractors $600 or more during the tax year, you are required to send them Form 1099-NCE by January 31st of the following year so they can complete their own taxes.?

Retirement Contributions

Small business owners can deduct the contributions made to employee retirement plans, as well as their own. Contributions made to the following self-employed retirement plans are tax-deductible:

Solo 401(k)

For the 2021 tax year, the maximum annual salary deferral is $19,500, plus an additional $6,500 (for those who are 50 years old or more). Business owners can also contribute 25% of their net earnings from self-employment, for a maximum of $58,000.

In the 2022 tax year, the maximum salary deferral will be raised to $20,500, plus the additional $6,500, and 25% of their net earnings from self-employment, for a maximum of $61,000.

Simplified Employee Pension IRA (SEP IRA)?

For the SEP IRA, the maximum employer contribution that can be made to each employee’s plan is the lesser of:?

$58,000 for 2021 ($61,000 for the 2022 tax year)?

OR?

25% of employee compensation (or 20% of net earnings from self-employment)?

Savings Incentive Match Plan for Employees (SIMPLE IRA)

In 2021, eligible employees can contribute up to $13,500 to their plan (this will be raised to $14,000 in 2022). Employers must make either a 100% matching contribution, up to 2% fixed contribution, or a 3% matching contribution. For the self-employed, all net earnings from self-employment can be put toward the SIMPLE IRA plan.?

Maximize Your Tax Savings with Xendoo

Do not leave money on the table during tax season! Xendoo delivers accurate?online bookkeeping, so business owners can stay compliant and maximize their tax savings! Our expert team is here to help.?Click here to schedule your free consultation.