After an extremely trying year, small business owners have a reason to rejoice — there are many tax breaks available due to the pandemic. The catch is knowing how to unearth these golden nuggets of tax savings. But you don’t have to become a tax expert overnight. You just need to know where to go for help.
“Block Advisors can help you get every credit, deduction and deferral you deserve,” said Ian Hardman, General Manager and Vice President of small business at H&R Block. “Our small business certified tax pros are up-to-date on recent tax law changes as well as the tax benefits of stimulus aid and other pandemic-related business impacts.”
A tax credit is an amount of money small business owners can subtract directly, dollar for dollar, from their taxes owed. Tax credits are not the same as tax deductions (outlined below). Tax deductions cut your taxable income, but tax credits cut your actual tax bill. This can get confusing but the key thing to remember is: it pays to pay attention to these things. Work with a tax advisor who knows what’s available to you and helps you claim every credit you deserve.
Two of the more prominent tax credits stemming from stimulus aid include the Employee Retention Credit (ERC) and the Families First Coronavirus Response Act (FFCRA) paid sick leave benefit. The ERC is a refundable tax credit designed to help small businesses keep employees on the payroll. The FFCRA includes several elements to help small businesses, with a focus on paid leave.
“We know small business owners are busy and don’t have the time, or desire, to dig into the details of these credits. But we understand these programs and can ensure our small business clients take appropriate advantage of them,” said Hardman.
A tax deduction is a business expense you can deduct from your taxable income. Here are a few of the more common small business tax deductions and tips for ensuring they fit the IRS criteria of a tax deduction.
- Home Office Use: If you use part of your home exclusively and regularly for business, you can deduct certain expenses like a percentage of your mortgage interest, insurance, utilities and repairs. You will also depreciate the portion of your home used as a home office.
- Vehicle Use: If your vehicle is used exclusively for business, you can deduct certain expenses. Two things to keep in mind: if you use your car for both business and personal purposes, you must divide actual expenses based on the percentage of actual mileage driven for business and personal use, because you can only deduct the actual cost of business use or use standard mileage rates for the business use. Also, the cost of operating the business vehicle is deductible only if there are detailed records to prove business usage, so maintain records!
- Employee and Contract Worker Wages: As a small business owner, your income from the business is not deductible, but payroll for your employees (W-2 employees) or contract labor (1099-NEC contractors) is. If you know you will be paying a contractor $600 or more, send them a 1099-NEC form and track your payments to them!
- Rent on Business Property: The cost of renting a business office space — like a storefront or office — is deductible.
- Advertising Costs: A big part of growing a small business is publicizing it. Ordinary advertising costs are deductible. Business cards, online advertising costs, billboards, mailers, signs, your business website, postcards and magazine ads are some examples of acceptable business deductions.
- Supplies: Generally, the cost of materials and supplies used for business purposes may be deducted as a business expense in the tax year they are used. Items acceptable for a deduction include things like cleaning supplies, paper and even supplies used to produce or ship products. But remember to keep appropriate documentation.
- Business Travel: If you travel for business exclusively, the cost of transportation (airfare, train, bus, etc.), baggage fees, lodging, and meals is deductible. Deductions for meals are usually subject to a 50% limit. Again, you must meet IRS substantiation requirements to claim any travel deduction.
And there’s more good news stemming from stimulus aid. If you received a Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL), you can deduct qualifying expenses paid with the money received from a forgiven PPP loan or emergency EIDL grants. It’s like getting the same benefit twice.
“Stimulus-related tax impacts can get complicated, but our Block Advisors small business certified tax pros are here to help you make sense of it all,” said Hardman. “You don’t have to go it alone. We can take that burden off your shoulders.”
As the name implies, a tax deferral is when you delay paying taxes until some point in the future. The March 2020 CARES Act allowed employers to defer the deposit and payment of the employer’s share of Social Security taxes, and self-employed individuals to defer payments of certain self-employment taxes. Tax deferrals are not something you should be expected to keep up on, but your tax advisor certainly should. Don’t pay more in taxes this year than you need to!
Block Advisors, a team within H&R Block, is dedicated to meeting the tax, bookkeeping and payroll needs of small business owners year-round. To start working with the tax experts at Block Advisors, visit blockadvisors.com.
Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.