So you’ve organized your books, filled out all the necessary forms (or sent your information to a CPA) and filed your taxes for 2020. Let’s pause and take a BIG sigh of relief.
Now that the 2020 tax year is literally in the books, it’s a great time to check in and reflect on what worked and where you might have opportunities to make the process easier. How did the process feel overall? Were you overwhelmed, or did you feel prepared and maybe even enjoy the challenge of getting the lowest possible tax payment?
While the experience is fresh in your mind, I encourage you to take some time to check in with yourself—particularly the aspects of accounting and tax preparation that felt pretty good and the ones that were most confusing or stressful. Did you make any smart money moves in the last year that saved you a lot on your tax bill? Right now is the best time of the year to identify what you can do to make next year’s tax prep a little less daunting.
It’s also the best time to explore and plan financial decisions you can make this year that will grow your business or improve your life and lower your taxes next year. I’ve put together a list of tax deductions that business owners like you can leverage for smarter financial decisions.
As of now, it’s a fact of life that you will need additional funds to supplement social security when you retire. However, it’s not something to jump into if you’re not ready; once your funds are in an account, it can cost you to get them back. So if you are at a point with your finances where it makes sense to start looking at a long-term investment strategy, a SEP IRA or a Solo 401(k) might be a great option—and it might be deductible! Do the research to find a plan that complies with IRS regulations and has “tax-qualified” status. Qualified SEP IRA, SIMPLE IRA, Solo 401(k) and Keogh plans are 100% tax-deductible.
For business owners, if there’s a chance you might expand and hire employees someday, keep in mind that the IRS has “nondiscrimination rules” you must follow which state that your selected retirement plan must benefit all employees, not just you.
Paying for health insurance without a traditional employer is a challenge, but it’s not impossible! You might be able to make up those costs on your taxes using the self-employment tax deduction. A qualified business owner can deduct medical, dental and qualifying long-term care insurance coverage for themselves, their spouse and dependents under age 27. The caveat is that if you’re eligible to enroll in your spouse’s employer’s plan, even if you decide not to, you cannot take the deduction.
Technically this is not an itemized deduction, but rather an adjustment to your income. Eligibility is determined month by month, so for any months you, your spouse and your dependents are not eligible for another plan, you can subtract any premiums paid from your Adjusted Gross Income (AGI). Also, the deduction cannot exceed the earned income you collect from your business. See IRS Publication 535 for more details.
These deductions often get overlooked because in order to qualify, your medical expenses need to take up a significant percentage of your income. What most people don’t realize is you don’t have to have a terminal illness to rack up enough medical expenses to write them off: fees for medically necessary (non-elective) treatments and equipment like inpatient addiction and rehabilitation programs, some hormone therapies and gender reassignment surgeries, service dogs and home modifications for medical purposes can all add up to large sums. So while you couldn’t write off that secret quarantine facelift, you might be able to deduct costs for a nose job if your doctor says you need it to breathe better.
Any individual can deduct certain medical expenses on their income taxes, regardless of whether you own a business or not. If your medical expenses for the year amounted to more than 7.5% of your AGI, you can itemize those expenses using Schedule A to deduct the total amount. If the above deduction for health insurance doesn’t apply to you, you may be able to deduct your premiums up to a certain amount using this method.
Alternatively, if you have a high deductible health plan, you can set up a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance and other qualifying medical expenses (except for insurance premiums) with pre tax funds. It’s also a great way to save for future medical expenses while defraying taxes on those funds.
Are you starting a new business this year? Congrats! Small business owners who have launched a new business venture in the latest tax year can write off up to $5,000 in startup expenses. These may include any costs incurred to create or buy the business, such as marketing, travel and training costs. The IRS classifies business startup expenses as capital expenses because they are used for an extended period, not just within one year.
If you are buying tangible business-use assets, such as vehicles or equipment, the costs of these assets must be depreciated over the life of the assets. Depreciation is a method where the cost of fixed and tangible assets are allocated over time; this allows you to measure how much an asset’s value has been exhausted within a given time. This is excellent news, especially for recent large purchases! Bonus depreciation allows you to claim a larger portion of depreciation on assets purchased within the tax year.
This one causes a lot of debate among CPAs. Some conservative accountants are leery of deducting high-ticket education expenses as a rule, but there are some situations where it’s perfectly fine. The IRS’s major issue is when business owners try to write off education preparing them for a career in another field. But for experts of all kinds, from consultants and coaches to service providers, a big part of their value comes from staying up to date on the latest industry trends, technology and concepts. And it can be pricey. For example, fees to maintain your license or that new marketing mastermind course are totally deductible. But getting a degree in nursing so you can close your advertising agency? That’s a big nope. (However, you may be able to write some of that off using the lifetime learning credit!)
Deductible education costs must add value to the business and increase the workforce’s expertise and skills above the minimum education requirement. Just stay away from deducting educational expenses that apply to different trades or industries.
Yes, there are some situations when you can deduct travel expenses for your business from your income tax. In general, qualified travel must be considered ordinary, necessary, and to a destination away from the state you live in. The IRS does stipulate that vacation expenses are exempt from this deduction, including trips where the majority of days away are not spent doing business and business trips that can’t be verified through correct documentation.
But we are living in the year 2021, and “bleisure” travel is a real trend. If you have a single ounce of fun on your business trip, the IRS is not going to drag you from the hotel pool kicking and screaming. If you are planning any type of gray-area hybrid business and leisure travel, I highly recommend working closely with a financial coach to determine what you might be able to deduct and what kinds of documentation you will need well in advance.
Some expenses you might be able to deduct include airfare, train or bus ticket costs, parking and toll fees, taxis and other modes of transportation as well as meals and lodging. Plan with care and enjoy the ride!
Business Use of Car
This is another type of deduction that requires a high level of detail in your record keeping. If you use your car, truck or SUV for both business and personal purposes, you must split out the costs based on actual mileage. It’s kind of a pain, but it’s well worth it if you drive a lot for work.
It used to be that you had to track your mileage by hand in a little notebook. But now, you can track your mileage directly in the Quickbooks app! There are plenty of other free and paid digital alternatives available that are just as convenient. I love using MileIQ because it runs in the background on your phone and it’s easy to categorize your trips; however, there is a small monthly fee. The mileage rate used to determine your deduction changes from year to year, and as of 2021, it’s at 56 cents per mile.
Other deductible costs may include registration fees and taxes, maintenance and repairs, licenses, vehicle insurance, rental or lease payments, tolls and parking fees. Vehicles used as equipment, like dump trucks, and vehicles used for hire, such as taxi cabs and airport shuttle vans, do not qualify for this deduction.
Legal and Professional Fees
Solopreneurs know that they are never truly working alone in their business. You wear as many hats as you can, but at the end of the day, there are some things you will need other professionals to assist you with. Most legal and professional fees that are necessary and directly related to running your business will be tax-deductible. These may include but are not limited to attorneys, business coaches and financial services.
Any fees you pay to independent contractors are deductible as well, so make sure you track these too! If you pay any of your independent contractors more than $600 in any given year, you are also required to send them a FORM 1099-NEC by January 31st of the following year. It’s a good practice to ask them for a W9 at the beginning of your working relationship, and provide them with a secure way to send you their information.
Keep in Mind…
Are you dreaming about the strides you can make towards financial independence this year? This is far from an exhaustive list of all the possible expenses you can deduct on next year’s taxes, but I think they are some of the most critical investments to plan ahead for.
Other costs to keep track of for tax time include (but are not limited to):
- Meals and entertainment
- Credit card processing fees
- Business credit card and loan interest
- Business bank account fees
Have any questions on planning for these expenses or keeping track of them? Get in touch with us for your complimentary consultation!