This year has been a rollercoaster for business owners like you. Heck, the last few years have been. After everything in 2020 and 2021, “inflation” and “supply chain shortages” have been the latest hurdles on this wild ride. That said, there does seem to be some easing on both of these fronts – and not just because of the “Inflation Reduction Act” (more on that and business tax deductions in a minute).
It can be difficult to see your way through it all and keep your business afloat when you actually want it to THRIVE. We do, too.
That’s one of the reasons we write these articles regularly – to not only “get you through,” but also to help you and your business move into new areas of fundamental strength.
More than that, we’re just an appointment away to give you some extra insight and strategy to make your business stronger. Call us anytime at 218-623-6050.
We’ll take a closer look at the recently-passed Inflation Reduction Act soon. It remains to be seen if the act will actually do what it purports to do (reduce inflation). Regardless, you’ll want to make sure your business isn’t vulnerable to new regulatory and tax pressure. With increased funding to the IRS and chatter about “tax dodging,” small businesses truly are in the crosshairs.
Besides, a smart business owner will want to go beyond “compliance with regulations.” Tax planning in your business needs to become a priority. There are moves you’ll want to make during the year to make more efficient use of tax deductions, help reduce your liability and keep you worry-free come deadline time.
So, let’s take a closer look at the changes to business tax deductions and how they will affect your business…
Note: these are in place NOW – the Inflation Reduction Act (IRA for short) will add new layers to some of these in the future. We’ll guide you through those, as well.
SMBs: Note These Changing Business Tax Deductions
“I just taught my kids about taxes by eating 38% of their ice cream.” – Conan O’Brien
Any change that can help your business survive is a good one these days, and the folks at the IRS have recently tweaked some of the most valuable business deductions — some deductions have been tweaked in your favor.
Here’s a look at some of the recent changes, along with some old standby deductions you should use if you can.
Business Tax Deductions: Meals and mileage
The rest of this year features a couple of revamped tax breaks for businesses. One of the most significant helps companies in general, but particularly one industry battered by the pandemic: restaurants.
Through the rest of 2022, businesses can generally deduct the full cost of business-related food and drink from a restaurant. (The limit is usually 50% of the cost of the meal.) To qualify, you or one of your employees must be there when the food or beverages are provided.
Another caution: According to the IRS, the expense can’t be “lavish or extravagant” and has to be reasonable. Yes, this strikes us as a gray area, too.
Grocery stores, convenience stores, and other businesses that primarily sell pre-packaged goods not for immediate consumption don’t qualify for these deduction purposes. If your company has a cafeteria on-premises, you also can’t treat that as a “restaurant” for this deduction (even if it’s operated by a third party).
You can see more about this deduction in IRS Publication 463, and we’d be happy to talk it over, too.
High gas prices have also stirred the IRS to raise the standard mileage rate for the rest of this year. (The IRS hasn’t changed the mileage rate mid-year for 11 years.) For the second half of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate at the start of the year.
This rate is optional. You can use it to figure out the deductible costs of driving a vehicle for business use instead of tracking actual costs. Other items impact deductions for mileage such as depreciation, insurance, and other costs. Again, check with us with any questions.
Working from home?
No, just remote working for your boss doesn’t qualify you for the famous home-office deduction. But if you’re a business owner now working from home, you might qualify. Usually, you must use a room (or what the IRS calls “other identifiable portion” of your home) exclusively and regularly for business.
You figure the deduction using one of two formulas:
Regular: You need IRS Form 8829, which generally divides the expenses of operating your home between personal and business use. Direct business expenses are fully deductible. The portion of indirect expenses – real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs – that you can deduct is based on the percentage of your home that you use for business.
Simplified: The 8829 has dozens of lines. The home office deduction worksheet on Schedule C, the tax form for sole proprietors, has way fewer. This worksheet gives you a rate of five dollars per square foot for business use of the home, with a maximum deduction for 300 square feet. Choosing this option means you can’t depreciate the portion of your home used for business but you can still claim allowable home mortgage interest, real estate taxes, and casualty losses as itemized deductions on Schedule A.
Miscellaneous business tax deductions – but still valuable
Insurance. You can generally deduct premiums for some insurance for your business: fire, theft, flood, or similar catastrophes. You can also deduct insurance that covers losses from bad debts, group hospitalization and medical insurance for employees, liability and malpractice insurance as well as some workers’ comp.
You can also deduct contributions to a state unemployment insurance fund if they’re considered taxes under state law. This includes overhead insurance that pays for business overhead expenses during long periods of disability caused by your injury or sickness, some health insurance if you’re self-employed, and all or some of the insurance for vehicles used in your business (though not if you use the standard mileage rate to figure your car expenses).
Other kinds of premiums can qualify. Again, let’s meet to discuss the details!
Bad business debt: You only get to claim this deduction if the amount owed to you was previously included in gross income and you’ve made a reasonable effort to collect.
Taxes: Well, isn’t it ironic. You can deduct on Schedule C various state, local and foreign taxes attributable to your business, including some income taxes, employment and self-employment taxes, personal property taxes and sales, excise, fuel, and real estate taxes.
All of these business tax deductions and policy changes can be difficult to keep track of, let alone knowing how they will affect your business. That, of course, is why we’re right here. Give us a call at 218-623-6050
Because we want to see you thrive,
The TCG Accounting Team