Congratulations, you started your own business. Now, you ask yourself; what expenses can I write off as a business? How do I claim them? On my personal tax or business return?

Let’s dive in the details of the top three small business deductions every owner should know in 2021.

The first small business deduction on our list is the business meal.

What is a business meal?

A business meal counts as any meal you have that is directly related to the business meetings of employees, agents, vendors, partners, as well as any meals associated with business travel status.

• Are you a real estate agent who takes clients out to lunch? It counts as a business meal.
• If you frequently travel for business and eat a meal at the airport restaurant, it counts as a business meal.
• If you meet up with a friend to chat during work hours… it doesn’t count as a business meal.

Now that you get the gist, let’s get to the good news.

Historically, businesses could deduct 50% of a business meal (both food and beverages).

In an effort to stimulate the hospitality industry post COVID-19, the IRS has increased the business meal deduction to 100% for 2021 and 2022, as long as the food and beverage is provided by a restaurant.

Please note the important qualification: food and beverage must be provided by a restaurant. Therefore, if you’re picking up food from a vending machine or any other third party, non-restaurant company, it does not qualify.

In order to make it easier at tax time, make sure to keep your receipts and pay for all meals with your dedicated business bank account or credit card. 

If you’re traveling for both business and personal activities, allocation will be required between the two. We recommended speaking to your accountant to discuss further complexities.

The second deduction on our list is a popular one: the travel tax deduction.

In order to deduct the cost of your travel, you must be away from home on business. However, there are numerous other rules that you must follow in order to avoid an unpleasant surprise if and when you’re audited.

1. Travel must be primarily business-related.

For example, acquiring a new business, meeting clients or vendors, attending a trade show or continuing education event all count as business-related travel. Going on a family vacation where you stop in to say hello to a vendor does not count.

2. Expenses must not be lavish or extravagant – they must be ordinary and necessary.

3. The trip must be long enough, and far away enough from your tax home, that you can’t be expected to complete it without getting rest over night.

While the rules are quite stringent for qualifying travel as business-related, the list of possible deductions is quite extensive.

Just a few of the items you can include in your deductions on business travel include:

• Local transportation
• Hotel expenses
• Rental car
• Telephone and internet
• Cleaning and laundry expenses
• Meals when traveling (100% in 2021 and 2022) including tips

Again, when mixing personal and business travel, you will need to allocate your travel expenses in proportion to the number of days you spend on business and personal activities. There are ways to maximize your deductions for combined business & personal trips, such as adding on a few personal days to a business event or setting up networking events, and an experienced accountant can help with this. 

Do you use your car for business? Great news – you can expense it!

When it comes to deducting auto expenses for business-related usage, you can deduct either the actual expenses or standard mileage. Each method has its advantages and disadvantages, and you should use the one that yields the highest deduction.

Let’s understand what each method entails.

Actual Car Expenses

When it comes to deducting actual car-related expenses, you can deduct the following:

• Lease payments
• Auto insurance
• Repairs and maintenance
• Gasoline
• Vehicle registration
• New tires purchases
• Parking and tolls

Standard Mileage Deduction

The other option is to deduct the standard mileage you use. This may make better financial sense depending on how old your car is and how much you drive for work. 

If you choose to deduct standard mileage instead, there are a few things you should note.

First, we recommended using an App to track your mileage, like MileIQ. MileIQ logs miles in the background automatically, so you don’t need to fuss every time you get in the car. Through the App, you can classify your miles (between personal and business), and print a monthly report to give to your accountant.

We recommended spending a few minutes each week to classify your miles through the App in order to not let it pile up.

In addition to the standard mileage, you can deduct your parking and tolls.

Be aware that if you want to use the standard mileage, you must do it so in the first year of using your car, then you can switch back and forth between actual and standard in later years.

If you need help classifying your miles, or deciding between actual and standard mileage deduction methods, get in touch with your accountant for help.

One last thing to remember when planning your tax deductions for 2021 is to document, document, document. Because the rules can be confusing, you must keep a log of your travel activities, and the reason for travel.

It’s nearly impossible to deduct business expenses without adequate receipts and logs.

Keep track of your reason for travel and each expense in an easy-to-understand spreadsheet or App. Your accountant will thank you!

And remember: deductible doesn’t mean free. It’s your money, so make sure it’s money worth spending.

If you need help differentiating between personal and business expenses, or want further advice on deductions you can take this year, please feel free to get in touch with one of our accountants anytime. That’s what we’re here for.

Until next time!