Tax Guide for Small Business Business Expenses

Tax Guide for Small Business Business Expenses

Tax Guide for Small Business Business Expenses

Now that most of you have already paid your taxes, you may realize that you need to be better prepared for the next tax season—including better handling of your business expenses. After the pandemic and the subsequent economic slowdown, companies are still cleaning up the mess, and controlling financial issues has never been more important. Here are the deductible business expenses in 2021, what is not deductible, and some tips on how to track your business expenses.

What are deductible business expenses?

The Internal Revenue Service (IRS) can relatively easily determine which are deductible business expenses and which are not. Therefore, the key is to maintain good records to help you keep everything normal. Deductible business expenses must be “ordinary” and “necessary”. The US Internal Revenue Service defines ordinary business expenses as expenses that are “common and accepted in your trade or business”, and necessary expenses as expenses that are helpful and suitable for your trade or business. The tax authority further pointed out that the fee is not necessarily necessary to be considered necessary.

Some examples of business expenses include:

  • Professional service fees (accounting, legal, consulting)
  • Advertising, promotion and marketing expenses
  • Bank fees, membership fees and subscription fees
  • Fixed costs (Rent, insurance, property tax, employee commission and salary)
  • Internet fees (web hosting, web design, domain name, WiFi)
  • Employee education
  • Licenses and permits
  • Maintenance and repair
  • Office expenses, utilities, postage and supplies
  • Office security
  • cyber security
  • Communication system
  • Car mileage (56 cents per mile in 2021)
  • Business Travel expenses for owners or employees

What expenses cannot be deducted?

Non-deductible business expenses are payments used to determine the cost of goods sold, capital expenses, and personal expenses.

  • Cost of Goods Sold (COGS): Whether your business manufactures products or buys products for resale, these costs will not be considered “deductible business expenses.” Instead, the material, transportation, storage, and labor costs involved are deducted from operating income and accounted for separately from deductible expenses. For sole proprietors and single-member limited liability company owners, COGS is included in the income portion of your Schedule C. Partnerships and multi-member limited liability companies use Partnership Tax Form 1065.For the company and S Corps, COGS is included in the income section of your company tax return, Form 1120, or Form 1120-S.
  • Capital expenditure: Capital expenses are expenses incurred by your business for the company’s future benefits, not operating costs required for daily operations. Examples of capital expenditures include fixed assets such as commercial equipment, property improvements, and patents.
  • Personal expenses: Your expenditures on family and family life cannot be deducted as business expenses, which is why it is so important to maintain Business and personal finances are separatedOn the other hand, many business owners nowadays work from home and use their cars for work and personal affairs. In these cases, the business owner is responsible for carefully recording the percentage of business expenses and the percentage of personal expenses. For example, many business owners ask: “Can I deduct my Internet as a business expense?” Although using the Internet in the office is considered an ordinary and necessary business expense, the cost of surfing the Internet at home may be a shared Business and personal expenses. In this case, expenses are allocated based on usage, and only business percentages can be deducted.
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Some previously deductible business expenses, such as employee transportation expenses, are no longer deductible. In other words, if you pay your commuter employees to ride the subway or bus, you are a generous boss, but the cost is not a deductible business expense. In addition, expenses that were once regarded as business entertainment expenses are no longer deductible. However, if the entertainment includes food and beverages, the business owner can deduct half of the catering expenses, but not any entertainment expenses. If the receipts for hospitality and meal expenses do not separate the expenses, the IRS will consider the entire hospitality expenses, and none of them are deductible.

How to better track business expenses

Although this may seem trivial, controlling business expenses is at the core of every successful business operation. Recording and regularly reviewing company expenses can help you identify excessive expenses, cut costs, and be better prepared when the tax deadline arrives. Try the following techniques to control your business expenses:

  • Technology savvy. Your company probably uses some type of accounting software, but does your program provide you with all the options and features you need? Have you taken advantage of the advantages offered by all software solutions? If your accounting procedures seem to be lacking, please seek advice from your accountant or other business owner. The best accounting programs can be customized to your needs, provide excellent support, provide useful applications, and are cloud-based, so you can enter expense information no matter where you are.
  • Be detailed. No one wants to spend time researching when the expense occurred and the exact circumstances of the expense a few months later, so please write down the details immediately. For example, every expense should be recorded with a comment, such as “free service, web design” or “utility, mobile phone.”
  • Separate business and personal expensesIt seems easy, but sometimes costs fall into a gray area. If you carefully separate your records and maintain different bank accounts, you will reduce any possible mix of business and personal expenses. Try to avoid using your personal card to avoid being reimbursed by the company.
  • Save receipt. Regardless of whether the receipt is paper or digital, please leave a place to keep copies of all receipts. You never know when your business will be audited.
  • Use a commercial credit cardUsing a business credit card can not only build your business’s credit score, but also simplify your expense management, because business credit card companies will break down expenditures by category in your reports and usually provide a year-end summary. You can also download the report directly into your accounting program.
  • Reimbursement of employee expenses. It is important to pay close attention to the expenses you reimburse for employees, such as business travel expenses. Some states, such as California and Illinois, require companies to reimburse employees for reasonable work expenses. In order to legally compensate employees for expenses, your business needs to create an “Accountability plan. “If you don’t have a responsible plan, any reimbursement of employees Regarded as wagesIf you and your employees follow the guidelines of the accountability plan, expenses may be deductible. However, if you do not have a responsible plan or do not follow the guidelines of the plan, the expenses will be treated as unreimbursed business expenses and cannot be deducted for the business or employees.
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    The IRS created a specific microsite Gig economy Provide useful advice and tax guidance for entrepreneurs.

    New tax credit

    As part of the U.S. rescue plan, small businesses can claim Refundable tax credit Compensate them (up to $511 per employee per day). They give employees any time off for receiving COVID-19 vaccination or recovering from COVID-19 vaccination. The plan is valid until September 30, 2021.related Internal Revenue Service website.

    There is a lot of discussion about changing the tax law in Washington now. We will let you know what happened (if any) and how this will affect your small business.

    Fundbox and its affiliates do not provide tax, legal or accounting advice. This material is for reference only and is not intended to be provided and should not be used as a basis for tax, legal or accounting advice. Before conducting any transaction, you should consult your tax, legal and accounting advisors.

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