Tax season can be stressful but with proper planning and preparation, it’s possible to lessen the sting a bit. As a small business owner, you may qualify for a host of deductions and credits. This was already true before COVID-19 came along. However, thanks to recent changes in the Internal Revenue Service (IRS) tax laws, you may be eligible for even more tax deductions in 2020 and beyond.
If your goal is to keep as much money as possible this tax season, below are 10 deductions worth exploring with your tax advisor.
Historically, small business owners have had to carry net operating losses forward, meaning you wouldn’t receive tax benefits for those losses until filing returns in future tax seasons. Fortunately, the CARES Act has modified this language to make receiving benefits easier. If, for example, you lost money in 2020 for any reason (including the pandemic), you’ll likely receive this small business tax deduction faster than in previous years.1
If you’re a “self-employed” business owner who works from home, it’s possible to deduct a portion of your rent or mortgage as office-related expenses. These small business write-offs also extend to utilities, maintenance, repairs, and even property taxes.
The IRS has extensive documentation about how to calculate what percentage of your home qualifies for this deduction. It also offers a simple alternative method – the safe harbor clause. Under this option, you’re allowed to deduct $5 for every square foot of your home dedicated to office work (up to 300 square feet).2 Although using this method may result in a smaller overall deduction, depending on the size of your home office, the safe harbor clause makes tax prep much easier.
Bonus tip: Although employees aren’t eligible for “home office” deductions, it’s worth letting any remote workers on the team know that they may be able to deduct all office-related expenses from their tax returns. This includes everything from printer cartridges to paperclips to the Bluetooth headsets they use for video calls.
Childcare expenses for kids under 12 are tax-deductible for both you and your employees. The same is true for older dependents who require care. If your business covers childcare expenses for anyone on the team, you can claim up to 25% of those expenses.3
The Paycheck Protection Program is a relatively new initiative designed to help businesses keep employees on the payroll – even as lockdown orders forced many small business owners to temporarily shut down their operations.
Although technically not a deduction, you don’t have to pay taxes on any PPP loans – provided you used that money for qualified expenses such as payroll, rent, telecom bills, or utilities.4
Under Section 139 of the IRS tax code, any “qualified disaster relief payments” that you’ve made to your employees potentially count as a small business write-off in 2020. This includes everything from funeral expenses and home repairs to hospitalizations and other emergency costs stemming from COVID-19. Your team will also be happy to learn they don’t have to report any qualified disaster relief payments on their tax returns.5
There’s a popular saying that goes, “When times are good you should advertise. When times are bad you must advertise.”
Most would agree that 2020 was a difficult time for small business owners. However, if you invested in promotion or advertising anyway, those expenses qualify as business deductions.6 Promotional expenses include everything from print advertising and business cards to website design and Facebook ads.
As a small business owner, you’re allowed to deduct any fees paid for company-related credit card memberships, payment processing, or monthly service charges. The same goes for interest payments made on business-related loans – including the credit cards your company uses to pay for goods and services.7 Paying fees isn’t fun, but it’s nice to know they qualify as tax deductions for small business owners.
Many organizations had to quickly adjust their business strategies when the pandemic came along. Just think about all the brick-and-mortar companies that suddenly had to move their operations online due to lockdown restrictions.
If your small business had to make similar adjustments, you likely qualify for research and development credits. In addition to online migration, this tax credit also covers changes such as improving current work processes, designing new prototypes, or developing entirely new business models.8
If you’re like many Americans, you may have used some of your “COVID downtime” to learn new skills or attend online workshops. If any of these improvements were business-related, you may be able to deduct those expenses from your next tax filing. This deduction even covers minor educational opportunities – such as that marketing book you recently purchased on your Kindle.9
U.S. employers are required to pay a 6.2% tax to help fund Social Security for their employees.10Although that 6.2% threshold still stands, the CARES Act has extended the deadline for paying this Social Security tax. Under the new rules, you’re allowed to defer payment over the next two years, with half the tax due by December 31, 2021, and the other half due by December 31 of the following year.11
In addition to PCI-compliant payment processing, Clover offers a full spectrum of business management solutions designed for small business owners across many industries, including:
Our POS solutions are integrated with popular accounting and CRM software to help make tax-time preparation easier.
Whether you need to accept payments, improve cash flow, or streamline your operations, our merchant services team is here to answer any questions you may have.
In addition, we have an extensive Covid-19 resource page to help your small business navigate the many challenges associated with the current pandemic.
This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.
1 “COVID-19 Small Business Tax Breaks You Need to Know,” LegalZoom, 5 January 2021
2 “15 Self-Employment Tax Deductions in 2021,” Nerdwallet, 16 February 2021
3 “10 Tax Credits for Your Small Business,” The Blueprint, 13 October 2020
4 “Do You Have to Pay Taxes on Your PPP Loan?” Entrepreneur, 27 January 2021
5 “26 U.S. Code 139 – Disaster relief payments,” Cornell Law School
6 “What Business Advertising Expenses are Deductible?” The Balance Small Business, 10 December 2020
7 “Are credit card fees tax deductible,” Bankrate, 28 February 2020
8 “R&D tax credits: A valuable cash infusion for businesses,” The Tax Adviser, 13 August 2020
9 “Deducting Education Expenses for Employees and Owners,” The Balance Small Business, 17 September 2020
10 “Topic No. 751 Social Security and Medicare Withholding Rates,” IRS
11 “Employers Have Limited Extension for Payment of Social Security Taxes,” JD Supra, 5 January 2021