The Focus - Our Tax E-Newsletter
Maximizing Small Business Tax Benefits
Do you own a small business? If so, taking action now to identify possible tax benefits will be helpful. There are several tax advantages and incentives for business owners. The following are just a few:
Enhanced Business Meal Deduction:
For 2021 and 2022 only, businesses can generally deduct the full costs of business-related meals purchased from a restaurant. It is important to keep track of meals purchased from a restaurant as opposed to meals that are not. Meals that are not purchased from a restaurant are still subjected to the 50% limit.
In order to qualify for the 100% limit, the business owner or an employee of the business must be present when the food or beverage is provided. Restaurants that qualify prepare and sell meals to retail customers for immediate on premise or off-premise consumption. Grocery stores, convenience stores, and other businesses that primarily sell pre-packaged foods not for immediate consumption do not qualify for the 100% limit.
For more information see IRS Publication 463, Travel, Gift and Car Expenses.
Home Office Deduction:
Many small business owners may have shifted to working from home since the pandemic and may qualify for the home office deduction. In order to qualify, a business owner must use a room or identifiable portion of the home specifically for business on a regular basis. There are two ways eligible business owners can calculate the deduction: the regular method or the simplified method.
The regular method involves filling out Form 8829, which divides the expenses of operating the home between personal and business use. Direct expenses are fully deductible. Indirect expenses (i.e. real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, maintenance, and repairs) are deductible only on the percentage of the home used for business.
The simplified method involves filling out a worksheet found in the instructions to Schedule C, the tax form for sole proprietors. This method uses a prescribed rate of $5 per square foot for the business use of the home. The maximum deduction is $1,500, with up to 300 business square feet allowed. Using this method allows you to deduct indirect expenses such as mortgage interest and real estate taxes as itemized deductions on Schedule A.
For more information about this deduction see IRS Publication 587, Business Use of Your Home.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit is a federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment. The credit is 40% of the first $6,000 of wages paid or incurred, with a maximum credit of $2,400 per qualifying employee. This is for an employee who is in their first year of employment, is certified as being a member of an eligible group and worked at least 400 hours of services for that employer. This is a one-time credit for each new hire and businesses of any size can qualify when they hire individuals from eligible groups.
Credit for Small Employer Pension Plan Startup Costs:
If you qualify as a small business owner, you may be able to claim a tax credit up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k)) This credit reduces the amount of taxes you may owe on a dollar-for-dollar basis. In order to qualify, you must have had 100 or fewer employees who received at least $5,000 in compensation, had at least one plan participant who was a non-highly compensated employee, and in the three tax years before the first year you are eligible for the credit your employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by you. Eligible startup costs include setting up and administering the plan as well as educating your employees about the plan. If you choose to use the eligible startup expenses to claim the credit, you cannot deduct them as an expense.
Other Tax Benefits:
Qualified Business Deduction
Many owners of sole proprietorships may be eligible for a qualified business income (QBI) deduction. The deduction allows eligible taxpayers to deduct up to 20% of their qualified business income. QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. This includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans.
As a business owner, making improvements can be costly. On the other hand, it does create an opportunity to capitalize the cost which could lead to tax savings in the year of the asset addition. Using Section 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service. For tax years beginning after 2017, the maximum deduction is $1 million.
Another way to deduct the full cost of an asset addition is Section 168(k) bonus deprecation. The year 2022 is the last year that a business owner can take 100% bonus depreciation, decreasing to 80% of the cost in 2023, and slowly phasing out through 2026. The advantages of bonus deduction vs. Section 179 are there is no annual dollar limitation, it is not limited to the annual profit of a business, and items do not need to be used more than 50% for business. To learn the tax implications of bonus deductions, ask your tax professional about whether or not the state(s) you file in allows bonus deprecation. As a business owner, you can elect out of bonus deprecation for any qualifying property placed in service during the taxable year, allowing you to spread your depreciation deduction over multiple years. The election applies to all property of the same property class that is placed in service by the taxpayer, in the same year.
As the year continues to move forward, business owners need to keep in mind the different tax benefits that they may qualify for and the possible tax savings. Please contact your Dermody, Burke & Brown advisor if you would like to discuss any of these tax benefits.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.