Even in a normal year, doing your taxes as a business owner can be a tremendous headache. But 2020 was anything but normal and there is a whole slew of additional considerations on tax deductions thanks to the pandemic, loans, relief packages, waivers, and interest deductions. Tax deductions may vary state-to-state and could be slightly different based on how your franchise is registered (e.g., sole proprietor, LLC, S-Corp, or partnership).
But before we begin—one caveat. We compiled this blog using readily available information on the internet and in no way serves as—or constitutes—professional tax and accounting advice. When filing an annual return as a small business owner, you should always consult your CPA, tax advisor, financial planner, or enrolled agent to make all final determinations on taking advantage of business tax deductions. The information contained in this blog is solely meant to be a handy guide for discussion purposes only.
Tax deductions, or write offs, are expenses that can be deducted from income to reduce the taxes due. The full amount of tax-deductible expense is subtracted from your taxable income. Any of this spending must meet all criteria from the IRS to meet the definition of a tax deduction. Here are some of the most commonly used examples:
This tax deduction is reserved for those who truly use their home as their principal place of business—not employees of a company working remotely because of the pandemic. To qualify, the use of a home office must be exclusive and regular.
To claim a tax deduction on vehicular use for business, you can either claim the mileage at 57.5 cents per mile, or you multiply all vehicular expenses by the percentage of use that wasn’t personally related.
Contributions to individual retirement plans can be tax deductible, but it’s based on a certain percentage and/or maximum cap of $57,000 a year.
These costs are fully deductible, including items such as website design and hosting.
Legal, accounting, and other professional fees are deductible, provided they were necessary and directly related to the operation of your business.
You are allowed to deduct the cost of paying for cell phone and internet services, so long as these were necessary to operate and run your business.
If your franchise operation accepts credit card payments, you are eligible to deduct any merchant or transaction-related fees.
Keep in mind that you must document any and all of your spending reported as tax deductions. This is easily accomplished by keeping careful track of all financial spending records. One final warning—late last year, the IRS announced a 50% planned increase in audits of small businesses.