If you are a franchise business owner, tax season might not seem like the most exciting time of the year – until you see the juicy return you can get from all those deductible business expenses. You might be surprised as to the tax write-offs available for franchise and small business owners. Taking full advantage of your eligible deductions and tax credits can make tax season feel just like Christmas.
Find out how business and franchise owners can reduce their income tax burden and maximize their tax returns. Learn about the changes and expansions to existing tax deductions that are new in 2021. And, see where your business franchise expenses crossover with personal expenses, and how to stay on the right side of the rules by the IRS.
The Total Guide for Franchise Business Owner Tax Deductions – 2021
For a franchise owner or small business owner, taxes can either be a burden or an opportunity for growth. Tax season presents the opportunity to recuperate some of the money spent on business-related expenses throughout the past year. And, there are several new and expanded ways for franchise owners to mitigate their income tax liability that did not exist before 2021.
The COVID-19 pandemic isn’t over yet, but if you’re an eager entrepreneur, 2021 is rich with opportunities. The CARES Act continues to provide help for small businesses and franchise owners. The federal government is trying to stimulate small businesses to grow by offering, among other things, tax incentives for many business owners.
What Makes 2021 Different for Small Businesses?
The reason 2021 stands out as an opportune time to start a small business is, in part, because of the crossover of work and home-life, which has become the new normal by the pandemic. Almost all of your business expenses are deductible, but your personnel expenses aren’t. So, what happens when you own a home-based business?
There are several ways in which this crossover of home and business, along with other deductions, can benefit your wallet:
Are Franchise Fees Tax Deductible?
When you become a franchise business owner there is an initial franchise licensing fee, as well as ongoing residual fees that are due on an annual basis. Unlike your standard business expenses, these franchising fees are categorized by the IRS as “Intangibles” in Section 179 of the tax code.
As such, you can deduct, both, the initial and ongoing franchising fees on your income tax return. These franchising fees and licensing expenses, however, have to be amortized on your taxes over 15 years.
New 20% Deduction for Pass-Through Businesses Qualified Business Income
The Qualified Business Income (QBI) deduction has been expanded to allow qualified businesses to claim 20% of net income as tax-exempt. The IRS stipulates that the business must be registered and operate domestically. Qualified businesses include sole proprietorships, partnerships, Some trusts or estates, and S corporations.
Restrictions to this deduction include certain types of businesses, the amount of W-2 wages paid to employees – and more. Income generated through a C corporation is also excluded from claiming the 20% QBI deduction. Check out the IRS website for basic information on QBI deductions.
Bigger Deductions on Office Supplies and Business Equipment
You probably know that you can take an office supplies tax deduction on the expense of office equipment, furniture, and supplies. But, did you know that you can also deduct the expenses associated with depreciation on your business supplies, equipment, and furniture? As of 2017, the maximum amount depreciation that could be claimed for business supplies and equipment doubled, from $500,000 to $1,000,000.
On top of that, if you put qualified business property into service before 2023, you can claim bonus depreciation as a business equipment tax deduction. Instead of getting your deduction on depreciation paid out over the useful life of the asset, bonus depreciation allows you to deduct 100% of the price of purchase in the same year the purchase is made. So, if you’re looking to start a business, now is a great time to get your operation up and running, since you lose the ability to claim bonus depreciation after 2023.
Own a Home Based Business
The home office deduction is a major benefit for new business owners in 2021. It acts as a bonus for doing any work on your home that connects to your business. For instance, if you put a new roof on your home, the percentage of the roof that covers your home office can be claimed as a home office deduction. So, the bigger your home office, the bigger your deduction.
The IRS, however, has some guidelines for claiming the home office deduction. The office must be the primary place where essential business takes place, and cannot be used in duel-purpose. So, if you claim the living room as your home office, it is no longer a “living room” for tax purposes.
Also, only a business owner can claim the home office deduction – not employees who find themselves working from home during the pandemic. For qualified owners, it allows you to write-off the costs of maintaining your office, utility expenses, repairs and renovations, and interest on your mortgage. To reiterate – you can only deduct the percentage of these costs that equate to your office usage.
These are only a few of the tax deductions available for franchise owners and small business owners in the United States – and there are many more. By making use of these tax incentives, you can greatly offset the startup cost for your business. Talk to a CCI associate today to learn more about becoming a home-based franchise business owner.