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end of year

Nov 09, 2021

6 Tax Deductions You Can Grab Before The End of The Year

With the end of the year rapidly approaching, many small businesses are focusing on their taxes and taking steps to reduce their year-end tax liability. There are several tax deductions that many small businesses are unaware of that can drastically reduce their tax bill.


In this short article, we will discuss five tax deductions your small business can grab before the end of the year.

 

1) Contributions to a Qualified Retirement Plan 

First, retirement contributions are a popular way to reduce tax liability. A SEP IRA is available for self-employed individuals. These retirement accounts allow contributions up to 20% of self-employment income, with the contributions being tax deductible. 

The deadline for setting up a SEP IRA is April 15th for the prior year’s contributions, meaning self-employed individuals still have time to set up and contribute to their SEP IRA that will benefit them for their 2021 taxes.

401ks are popular with businesses and their employees. Employees can contribute to a qualified 401k plan in an amount up to $19,800 per year, with a catchup amount of $6,500 per year offered for those over 50 years of age. 

Businesses can also make a profit-sharing contribution of up to 25% of their payroll to their employees’ 401k plans. This provision is unique and popular for individuals who are both owners and employees of the same business.

Setting up the proper business structure to fully take advantage of tax-deductible retirement contributions is beyond the scope of this article, but we can provide detailed instructions on how it should be established. Just schedule a consultation:

 

2) Home Office Deduction 

The home office deduction is somewhat complicated, however, it can be valuable in reducing your tax bill. The COVID-19 pandemic has caused many small business owners to work more from home and led to many seeking help on if they can deduct expenses related to working from home. 

The IRS has established guidelines to determine which expenses incurred while working from home are deductible. The home office must be used “exclusively and regularly” for business purposes. This means that most administrative and management activities are done there. An effective way to ensure that the home office meets these requirements is to set aside an area of the home exclusively for office work. They cannot also have an outside office and attempt to claim a home office deduction.

A separate room is not necessary if the area is measurable and only used to conduct business activities. For example, if a business owner uses a separate room to run their business but also as an exercise room, the IRS may decide the room was not used exclusively for business activity and decline to accept the claimed deduction. 

If the same business owner clearly separated the area into a section used to run the business and a section used to exercise, he or she stands a much better chance of having their deduction accepted. A good practice is to keep documentation such as pictures and measurements of the home office to ensure any questions that may arise related to the deduction are easily answered.  

  

3) First Year Bonus Depreciation  

The first-year bonus depreciation is new and was implemented under the Tax Cuts and Jobs Act. This deduction allows businesses to deduct 100% of the cost of new and qualified property during the past year that was also placed into service. Buildings and other structures do not qualify, and the equipment must have been in use by the end of the year.  

For example, if you order a laptop for business use on December 20th of this year but the laptop will not arrive until January 5th, the laptop’s cost would not be deductible under this provision as it was not put in use before the end of the year.  

Taking this deduction may be ideal for businesses with a large amount of income in the current year that they would like to offset with additional deductions.  

 

4) Charitable Contributions 

Charitable contributions are not deductible on business tax returns but pass through to the owner’s individual tax returns. They are available for taxpayers who itemize their deductions. Deductions are also allowed for non-cash items donated to charity on a taxpayer’s Schedule A form.  

 

5) Contributions to a Health Savings Account (HSA) 

Contributions to a qualified HSA are tax deductible up to $3,600 for individuals or $7,200 for family coverage for 2021. The deduction is available until April 15th, 2022, so taxpayers can contribute until that date and claim the deduction.


 


6) Claim the Employee Retention Tax Credit (ERTC) 

The ERTC is a tax credit rather than a deduction but is another way to reduce a small business’s tax bill. For 2021, the ERTC allows tax credits for businesses that were either fully or partially closed due to government orders or had at least a 20% reduction in gross receipts from the corresponding quarter in 2019, or the previous quarter. 

The business can claim as a credit 70% of the wages of each full-time employee, with a cap of $7,000 per employee per quarter. Because the ERTC has been updated recently, it is a good idea to consult a tax professional to ensure you maximize the potential credit.  

This list goes over just a few tax deductions business owners can claim before the year ends but there are others to consider. Download our Tax Deduction Checklist to get some of the most common tax deductions business owners to claim on their returns.

 

Disclaimer: Lowering your tax bill is not always the right answer. For example, if in the next 1-5 years you want to take on additional lending, qualify for a new home (or refi), or desire to sell your business for top dollar, having accelerated deductions and lowering your tax bill may end up hurting you in the long run. Tax planning and advising are not about assisting with lowering your deductions but about helping you meet your goals.

 

 

Disclaimer:

This publication is designed to provide information on federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.

This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.

This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.

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