Tax Incentives for Small Business Owners
Tax season is upon us, and it is time to start gathering documents and familiarizing ourselves with the latest tax updates and possible deductions. Tax deductions help small business owners to make the tax-filing process more manageable. These deductions are subtracted from your taxable income and can make a big difference in how tax season affects your business financially.
Before you get started it is essential to be aware of the tax category status of your business. Are you considered a sole proprietorship, LLC, S-Corp, or something else? Eligibility for certain deductions can vary based on which category your business falls under.
Business Tax Deductions
When filing your taxes, and preparing for future tax seasons, remember to keep track of all of your business-related expenses. This includes anything related to employees such as payroll, retirement contributions, bonuses, and benefits. Anything related to running your work or home office can also deduct a portion from the amount you owe. This can include rent, lease, real estate taxes, utilities, and mortgage interest. Keep track of any expenses from education/professional development, ad/marketing campaigns, and charitable contributions as these are also deductible.
Recent Changes to Tax Deductions
The IRS updated some business deductions in 2020 and 2021. According to Small Business Trends, the following deductions are no longer in effect for the 2022 tax year.
Business use of a car. In 2020, the deductible mileage rate for business cars was 57.5 cents per mile. In 2021, this rate has dropped by 1.5 cents, down to 56 cents per mile.
Business interest payments. In 2020, interest expenses could be deducted from up to 50% of taxable income. However, for the 2021 tax year, interest expense deductions can be made from up to 30% of taxable income.
Net loss deductions. If a business lost money in 2021, the entire net loss cannot be deducted. For those business owners who are married or filing jointly, the deduction is limited to $524K, while single individuals are limited to a deduction of $262K.
Non-deductible employee expenses. There are certain expenses you can’t deduct in 2022 but are scheduled to return by the 2026 tax year. These include, but are not limited to, credit or debit card convenience fees, investment fees and expenses, and service charges on dividend reinvestment plans.
Some Deductions You Might Qualify For
Yahoo! Finance has identified three important tax breaks available to small businesses. These deductions include:
Employee Retention Credit- Business owners can retroactively deduct any wages paid between March 12, 2020, and December 31, 2021. It is important to keep in mind that you can claim up to $26,000 per employee if you can prove that COVID-19 affected your business revenue.
SUV Depreciation-If you own an SUV (with gross vehicle weight ratings between 6,000 and 14,000) that is used for business purposes, you can choose between two different depreciation deduction methods.
Business Meals Deduction - Any business meals that your business paid for in 2022 can be deducted at 100%. Keep in mind that this percentage decreases to 50% for the 2023 tax year.
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