Small businesses should begin planning now to take advantage of a 100% deduction for business meals, and other tax benefits, available to them on their 2022 federal income tax returns that they will file next year.
The IRS says that with next year’s filing deadline nearly a year away, any entrepreneur still has time to identify possible tax benefits, take action to qualify for them, and then claim them when they file in 2023.
Enhanced Business Meal Deduction
For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. Otherwise, the limit is usually 50% of the cost of the meal.
To qualify for the higher limit, the business owner or an employee of the business must be present when food or beverages are provided. Moreover, the expense cannot be lavish or extravagant. Restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption.
For this purpose, grocery stores, convenience stores and other businesses that primarily sell pre-packaged goods not for immediate consumption, do not qualify as restaurants. Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if they are operated under contract by a third party.
For more information about this provision, as well as details on the special recordkeeping rules that apply to business meals, see IRS Publication 463, Travel, Gift, and Car Expenses.
Home Office Deduction
With a growing number of business owners now working from home, many may qualify for the home office deduction, also known as the deduction for business use of a home.
Usually, a business owner must use a room or other identifiable portion of the home exclusively for business on a regular basis. Exceptions to the exclusive-use standard apply to home-based daycare facilities and to portions of the home used for business storage, where the home is the only fixed location for that business.
Those eligible can figure the deduction using either the regular method or the simplified method.
To choose the regular method, fill out and attach Form 8829, Expenses for Business Use of Your Home. In general, this form divides the expenses of operating the home between personal and business use. Direct business expenses are fully deductible. On the other hand, the business portion of indirect expenses, such as real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs, is figured on this form, based on the percentage of the home used for business.
Alternatively, instead of filling out the 44-line Form 8829, business owners can choose the simplified method, based on a 6-line worksheet found in the instructions to Schedule C, the tax form for sole proprietors. This method has a prescribed rate of $5 a square foot for business use of the home. The maximum deduction is $1,500, based on business use of at least 300 square feet.
Though homeowners choosing the simplified option cannot depreciate the portion of their home used for business, they can still claim allowable home mortgage interest, real estate taxes and casualty losses as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.
Under both the regular and simplified methods, business expenses that exceed the gross income limitation are not deductible. For more information about this limit, along with other details on the home office deduction and both methods for figuring it, see Publication 587, Business Use of Your Home.
Other Tax Benefits
From business startup expenses to the qualified business income deduction to the health insurance deduction for self-employed individuals, there are a variety of other tax benefits that are often available to entrepreneurs and other business owners.
For details on these and other tax benefits, see Publication 535, Business Expenses. Details on another major expense for most businesses, depreciation of buildings, equipment and other assets, can be found in Publication 946, How to Depreciate Property. Yet another worthwhile resource for any small business is the agency’s Tax Guide for Small Business, Publication 334. All these publications are available on IRS.gov.