QuickBooks, a Salesforce partner, wrote this article.
2020 was a difficult year for small business owners. Some struggled to keep their doors open amid shelter in place orders. Others faced challenging hurdles as they worked to comply with pandemic restrictions. All the while, tasks like running payroll, tracking expenses, and yes, still paying those small business taxes (while still trying to save money), still had to happen.
Business owners in the United States felt at least some semblance of relief when the 2019 tax deadline was postponed from April to July 15, 2020 (or October 15 for those who requested an extension). But now, with the 2020 tax deadline creeping up on May 17, they’re left feeling like they just did this.
Diving back into tax season so soon can feel, well, taxing. But with proper preparation and the right accounting software, you can file, pay your small business taxes, and save money — without losing your mind.
Deducting business expenses can help you save money on taxes. But changes to tax laws can also change deduction allowances. When you run a small business, every penny counts. Here are some effective ways to determine what you owe this year.
Itemize and track deductions
For many small business owners, part of the struggle in doing taxes is itemizing deductions. Itemized deductions are business expenses that the IRS allows you to subtract from your gross income, reducing your taxable income. It takes a lot of work to account for all those deductions, and you have to keep track of your receipts throughout the year. However, the money you save can make the extra work worthwhile.
If you want to itemize deductions, know your deductible expenses should exceed the 2020 standard deduction. That’s $12,200 for single-person filing, $18,350 for head-of-household filing, or $24,400 for married filing jointly. There are also a few reliable indicators you can use to determine if itemizing deductions is right for you:
- You had significant out-of-pocket medical or dental expenses.
- You paid interest or taxes on your home.
- You had significant employee business expenses that were not reimbursed.
- You had sizable out-of-pocket casualty or theft losses.
- You made substantial charitable contributions.
If you decide to itemize, your next step will be to determine which expenses are allowed as deductions. When it comes to your typical business expenses, some allowable deductions might be obvious. Business vehicle costs, employee wages, office supplies, and business travel are all common deductions for small businesses.
But some deductions are not so obvious. These can include small business insurance, costs for professional development, and interest collected on bank loans. You can even write off certain tax payments as business expenses. State, local, and foreign income tax and personal property taxes are some examples.
Deduct startup costs
Launching your own business comes with a lot of uncertainty. But studies show that many aspiring entrepreneurs plan to start a new business in 2021. In fact, for some, the pandemic actually accelerated their plans to set up shop.
These new business owners may be wondering if they can afford their startup costs — or if they can deduct them from their business taxes.
Startups can deduct up to $5,000, as long as the total cost to start that business was no more than $50,000. But you must gradually write off any costs over $50,000. Also, the IRS does not cover startup costs if you never opened the doors. Additionally, there are three categories eligible for startup deductions:
1. Costs to investigate and create your business
This category is broad but covers any expenses incurred to investigate, open a new business, or acquire an existing business. Expenses can include conducting market surveys or research, analyzing products, locating suppliers, researching labor supply, or visiting potential business locations.
2. Costs to open your doors
These deductions are more focused on the tasks that led to opening your doors. These can include costs for training new employees, advertising and marketing, consultants or legal assistance, or traveling to visit distributors or suppliers. The only exception is equipment costs, which you can only write off in small portions. And if your business is home-based, you can write off your home office as a business expense.
3. Organizational costs
This last category covers any costs accrued to set up your business as a partnership or corporation. These can include legal fees, filing and accounting fees, state organization fees, and some other costs associated with directors and organizational meetings. Your business has to have been incorporated within its first year to qualify as a deductible expense.
Pinching pennies and protecting your business
Saving money during tax season can be a huge win for your business. If you are unsure or have questions about filing taxes, speak with a tax expert to make sure you’ve covered all your bases. If you’re worried about an audit, the IRS suggests keeping all your records for at least three years, depending on how you file. For many business owners who use automated or artificial intelligence (AI)-driven accounting software, those expenses and receipts are often saved automatically.
Itemizing your small business taxes can take time, but it will be well worth the savings if you qualify. After all, you can put those savings right back into your small business to fund success in the new year.
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