6 Tax Questions Small Business Owners Are Asking

By Amanda Prill | March 4, 2022 | Tag(s): 

Tax time can be tricky, particularly for small business owners. The combination of changing tax laws and the ongoing impact of the pandemic creates added complexity for 2021 tax filing. With more than 20 years of experience in managing operations and business finances, I focus on helping other business owners cultivate financial growth. For this year’s tax season, I’m sharing answers to the most common tax questions that I’m hearing from small business owners right now.

What do I need to file taxes for my small business?

As a small business owner, the most important action you can take to be ready for tax time is to maintain accurate financial records. Keep meticulous records of all income, cost of goods sold, expenses, fixed assets and loans relevant to the current tax year. Accuracy and detail are key. Working with a qualified bookkeeper or accountant trained to categorize and track this information in alignment with tax laws can make tax time a breeze.

What expenses are tax deductible?

The IRS states that business-related expenses must be “ordinary and necessary” in order to be tax deductible. Here is a list of common types of small business tax deductions:

• Advertising and marketing
• Business insurance
• Continuing education and training
• Depreciation of assets
• Legal and professional fees
• Meals with clients or employees
• Office supplies
• Phone and internet
• Rent and/or home office
• Software, app and portal subscriptions
• Travel expenses, including meals
• Vehicle and/or mileage for business use

An accountant can help you navigate the nuances of tax law related to education, meals and vehicle expenses.

Are meals 100% tax deductible?

Beginning Jan. 1, 2021 through Dec. 31, 2022, qualifying business meals purchased from a restaurant are 100% tax deductible under the Consolidated Appropriations Act of 2021.  Qualifying meals require an owner or employee of the business to be present, and the meal must be consumed with a business contact (e.g., customer, employee, vendor, consultant). Travel-related meals also qualify. Unfortunately, your morning coffee or an in-town lunch pit-stop in between clients isn't tax deductible. As with all business qualifying expenses, the IRS requires the expense to be “ordinary and necessary,” and the meal may not be “lavish or extravagant.”  

Am I eligible for a home office deduction?

Many small business owners now work from a home office due to the pandemic and the increasing necessity to cut expenses. Business use of your home is tax deductible if you meet the IRS requirements. For example, you must demonstrate dedicated home office space that is used as your principal place of business. Storage of inventory may qualify for a deduction, too. Your tax accountant can help you determine if you qualify and the best method for taking advantage of the home office deduction.

Is the Paycheck Protection Program (PPP) relevant to my 2021 tax filing?

The rules and regulations related to PPP for 2021 remain the same as 2020. Therefore, business owners who leveraged the second round of PPP during 2021 won't be taxed by the federal government on forgiven loans.  Additionally, companies awaiting confirmation of loan forgiveness don't pay taxes on PPP funds if the company reasonably expects to receive forgiveness of their PPP loans. Whether a borrower’s forgiven loan is taxable at the state level depends upon the state. Business owners should check with states where the company files income tax to determine if the state followed federal guidelines or enacted its own ruling.

Should I make estimated tax payments?

The IRS requires most small business owners to make quarterly estimated tax payments if they expect to owe $1,000 or more when their return is filed at the end of the year. The best approach to estimating how much to pay depends upon the predictability of your income throughout the year and your overall financial picture. Also, your business structure will determine what taxes you pay. Not paying or underpaying your estimated taxes on time can prove costly. The penalties increase not just with time, but the more you owe as well. The 2021 deadlines for estimated tax payments have passed, but the first payment for 2022 is due April 18.

My business lost money during 2021. Is there a tax break?

Businesses that incur more expenses than income during the tax year experience a Net Operating Loss (NOL). During 2020, the CARES Act removed the existing limitations on NOLs, allowing losses to be carried back for 5 years and carried forward indefinitely. However, 2021 loss limitations are back. Because complex rules govern NOLs, it’s a good idea to consult a tax professional to understand how NOLs impact your specific tax situation.

Amanda Prill is the owner of Added Impact Consulting. She served as the CEO for a start-up government contracting firm that grew to almost $4M in 3.5 years. This unique perspective allows Amanda to see red flags within an organization’s finances and add more perspective than the typical bookkeeper. She holds a Master of Business Administration (MBA) and has 20 years of experience in managing small businesses, operations and business finances. When not in her office, you can find Amanda cycling, soaking up the sunshine, crafting or golfing with her husband.