Tax Deductions for Small Businesses: COVID Supplies and More

As you are going over your end-of-year accounting checklist and looking at expenses compared to previous years, you will notice a big difference for the year 2020. The amount that you spent on COVID-19 safety supplies adds up over time. Are these expenses tax deductible?

What Is a Tax Deduction?

A tax deduction is when you subtract a qualified business expense from your total taxable income. Essentially, the amount you spent on the ordinary and necessary business expense is tax-free and does not need to be included in your taxable income.

The words ordinary and necessary are the verbiage used in the internal revenue code. When it comes to your business expense, you will have to explain how it’s ordinary compared to other small businesses in your industry. And you will also have to be ready to prove that it is necessary to qualify for a tax deduction.

Are COVID Supplies Considered Ordinary and Necessary?

Given that we are in the middle of a pandemic, I think it is safe to say that safety supplies for COVID-19 are necessary. Many businesses were closed for the stretch of 6-weeks to 2-months, and when they reopened, they showed they were ready for customers by posting their safety practices. If a small business reopened without any safety measures in place, then many people did not feel comfortable going into that business. It is necessary to have safety measures in place if you want customers to come to your store.

Along the way, masks were mandated in each place of business. If a customer were to forget a mask, then it is helpful for the company to provide a mask. It is also necessary for companies to supply their customers and employees with hand sanitizer, social distancing reminders and cues, and plexiglass shields for employees who meet face to face with customers all day long.

One of the ways that expenses can be distinguished as excessive rather than ordinary is by giving out top-of-the-line free masks. Say your business has some masks available for customers who were not prepared with a mask before entering your store. Paper, disposable masks would be considered an ordinary expense. If your masks-on-hand are embroidered in a fancy print with a customized logo, then that free mask service would be regarded as excessive. That expense would not qualify as a tax deduction.

When it comes to COVID-19 safety measures and the supplies needed to implement them, all of these items are considered tax deductions:

  • Hand Sanitizer
  • Paper Masks
  • Social Distancing Decals
  • Plexiglass Shields
  • Plastic Gloves
  • Employee Reusable Masks
  • Cleaning Supplies
  • Signage Referring to Safety Practices
  • Extra Employees Hired to Implement Safety Practices
  • Thermometers

Your 2020 expenses will look a little different than previous years and will continue through 2021 as well. When you plan for these expenses and remember to include them as tax deductions, you will see the benefits outweigh the negatives. You want your business to have a reputation for safety and compliance. All customers with varying health conditions are welcome to your business and can feel safe there.

What Other Small Business Expenses Are Tax Deductions?

There are many expenses when running a small business that can be considered ordinary and necessary. We can review some of the most common tax deductions for a small business to be sure that you don’t have a big expense that is overlooked. Remember, the more tax deductions, the less taxable income. When you have a lower taxable income and use that number to calculate your tax rate, then you will pay a lower number in taxes.

It is easy to get confused about what is tax-deductible and what is not when your personal and business world is so intertwined as a small business owner. The most common tax deductions for a small business can include:

  • Gas Use for Business: Keep a clear mileage log when you are using your personal car for business affairs. You can use the standard mile calculation provided by the IRS, or you can keep track of your monthly payment and any maintenance bills for the car. Add that up with the total spent on gas, and then multiply it by the percentage of miles that were used for conducting business. When tracking miles, you cannot include your commute from your home to the place of business. That is considered a personal expense.
  • Business Insurance: You can use premiums spent on various forms of insurance for your business as tax deductions. This can include accidental insurance or worker’s comp. It can consist of insurance for your large assets in your business. It can include group health insurance or life insurance that you provide for your employees.
  • Interest on Business Loans and Bank Fees: If you have interest accruing from loan payments or incur bank fees for using a premium business account, they are tax deductions. If you use a third-party service to process payments like PayPal or Stripe, then the fees for that service can be deducted as well.
  • Home Office: Many people transitioned to working from home this year. If you set up a nice office in your home and purchased a desk and office furniture, then the supplies are counted as tax deductions. The space must be distinguished from the rest of your home as a place of business, so your kitchen table won’t count. You can calculate your deduction by a provided calculation per square foot in your home.
  • Internet and Phone Expenses: If you use your home internet for work, you can deduct the percentage of your time conducting business. A separate phone line or business phone can be deducted entirely. Be sure not to deduct your personal phone bill from your small business taxes. If you are using a phone for personal and business purposes, then your whole bill does not qualify as tax-deductible.
  • Business Meals: In general, you can deduct 50% of meal and beverage costs. Meals with clients or on the road while traveling for business are qualifying tax deductions, as long as it is not extravagant. Meals provided for your employees who stay late to work are also deductible. When it comes to meals at a work party, they are 100% tax-deductible. Proper documentation is needed when using meals as tax deductions. You can save the receipts and write down what business matters were discussed during the dinner.
  • Advertising and Promotions: The expenses incurred from advertising and offering promotions are tax-deductible. If you choose to sponsor a school or an event, that can be a tax deduction. Building a new website or hiring a graphic designer to create a new company logo is also included in this category. Any cost you put toward putting your name out into the community can be tax-deductible.
  • Continuing Education: If you can prove that your education is of value to your business, whether it’s for a license or certification or a degree, then it is counted as a tax deduction. This can include seminars or workshops to improve your skills and inspire you to grow your business. It can also include employee training.
  • Rent: The money that is paid in rent for a brick and mortar office or store is tax-deductible. If you work from home, then part of your rent can be deducted if you use the home office tax deduction.
  • Salary and Employee Benefits: Salary paid to employees, including paying out their vacation and sick days, can be counted as tax deductions. This only applies to employees who are not owners. And the service has to be provided; you cannot deduct a salary if the person isn’t providing you with work. The salary also has to be reasonable, comparable to other employee salaries in the industry.
  • Taxes: This can include sales tax, payroll tax, real estate tax, any taxes that are paid while conducting business are tax deductions. This also includes state income tax. When buying inventory for your business, you are exempt from taxes. And if you have paid them, then you can use that money toward your tax deductions for the year.

When it comes to tax deductions, the list can go on and on. The most important part of adding up business expenses to list as tax deductions is keeping a comprehensive record. If you were to be audited, your documentation should back up all of your tax deductions and explain anything that the IRS may question.

Hire a Small Business Accountant

It is possible that you are missing a chunk of tax deductions that could bring your taxable income down immensely. Invest in a small business accountant and get the return on investment instantly in the tax advice they give. Our team has extensive experience with small businesses and qualifying tax deductions. You will not go wrong when you hire an accountant who works exclusively with small businesses.

If it is unclear whether you can deduct a business expense from your taxable income, contact a professional small business accountant to help. Here at Easier Accounting, we have the expertise to set your business up for success. We can find the best savings available to your business as you file for taxes this year. Call us at (888) 620-0770.

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