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2020 Tax Return Checklist for Business and Personal Tax Deductions

Tax season can be a stressful time for small business owners and individuals. Unlike other tax years, the 2020 COVID-19 crisis led to several tax changes such as unemployment benefits and P.P.P. loans. Despite these reforms, there’s one thing that has remained consistent in the minds of most tax filers: saving money.

Knowing and taking advantage of your tax deductions is a surefire way to achieve this goal. For this reason, our team prepared this helpful document detailing your tax return checklist for the 2020 tax year.

COVID-19 Related Tax Changes

Before we get to your 2020 tax return checklist, there are a few things to note on the pandemic-related tax changes.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act

Under this stimulus bill, small businesses received financial support under the Paycheck Protection Program. Additionally, every taxpayer would receive a $1200 stimulus. Furthermore, qualified individuals who took loans from their retirement plans received a 10% tax relief that usually applies to withdrawals from such accounts if they’re not 59 ½ years old.

For the current tax period, the deadline to file your 2020 tax returns is April 15th this year. For single and joint tax filers, the standard tax deduction surged from $12,200 to $12,400 and $24,800 from $24,400 respectively.

Covid-19 Related Tax Changes

Every business in the U.S. must file tax returns. However, the approach for paying taxes is dependent on the type of business structure. Let’s take small companies, for instance. These organizations are both small S-corporations and pass-through entities.

As a consequence, all company losses and tax advantages pass through to the business owners. Therefore, the owner’s discrete income tax rate applies when filing returns for the business.

Tax deductions are expenses that lower your taxable business income. For such income to be deductible, it must meet the I.R.S. standards, i.e., the cost must be ordinary and necessary. In comparison, tax credits reduce your tax liability by decreasing your tax bill. Therefore, whereas your tax brackets influence the amount you’ll receive in tax deductions, tax credits on the other hand bring about direct savings.

Your 2020 Tax Return Checklist: Know Your Deductions

  1. Advertisement costs

For small business owners, promoting their business can be costly. Therefore, knowing that marketing costs are fully deductible provides relief. The only exceptions are expenses incurred from lobbying and financing political drive. These deductible expenses include:

  • Printing costs
  • Website creation
  • Promotional cards to potential and current customers
  • Marketing campaigns
  1. Bank charges

It’s always wise to open a discrete business account even if your business is a sole proprietorship. The reason being individual bank accounts don’t enjoy the same privileges. Some of the deductible business account fees include annual charges, overdraft fees, and third-party transaction fees.

  1. Business meals

Another deduction to include on your tax return checklist is the cost of business meals. To qualify for the 50% deductible food costs, you must fulfill the following:

  • Prove the expenses were ordinary and necessary
  • That the business meals were not fancy
  • One of the team members was present during the business meal

Other business meals that are also deductible include food bought for staff working overtime and food provided during office events. A good practice would be keeping detailed records of these meals, including restaurant receipts and meeting purposes.

  1. Insurance

The deductible premiums for your company’s insurance include workers compensation and liability coverage, auto and life insurance, employee group health insurance, and property coverage.

  1. Business vehicle expenses

To qualify for this particular deduction, you must prove that your vehicle is solely for company tasks. However, if you use the car for personal and business errands, you could isolate the costs incurred during business runs. There are two acceptable ways of calculating these expenses.

  • Actual expense. Here, you’ll need to track your annual operation costs, i.e., repairs, fuel, and registration charges. Then multiply these costs by the distance covered during business errands.
  • Standard mileage rate. If you chose this method for the tax year 2020, you’d need to multiply the miles driven for business runs by the standard mileage deduction, which stands at $0.57½ per mile.
  1. Depreciation

Depreciation write-offs apply when you buy business assets such as office equipment and furniture. Unlike other tax-free expenses, these deductions are more complex. Therefore, we recommend talking to a tax professional to know which business assets are applicable. Additionally, only a C.P.A. can explain the I.R.S. acceptable methods for deductions such as bonus depreciation, section 179 deduction, and De minimis safe harbour election.

  1. Education expenses

Education expenses are only valid for deductions when proven to add business value. Here’s a list of the everyday acceptable education expenses.

  • Work seminars
  • Industry workshops
  • Short courses that are business-related
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  1. Home office costs

If you run your business from home, it’s possible to deduct certain expenses. However, to qualify for these deductions, you must meet two requirements.

First, you must prove that your home office is solely for business purposes. It would help if you had pictorial evidence to attach to your tax documentation. Secondly, your home office must be your primary place for conducting business activities.

  1. Tax deductions claimable under individual file returns

Unlike the write-offs mentioned above that fall under business income, business owners can claim the following deductions under their income returns. These include charity and retirement contributions, dependent care, and health care costs.

Working with a Certified Public Accountant

Knowing the available deductions for all of your business expenses not only lowers your tax burden but also ensures you receive tax credits. If you’ve never sought the assistance of a certified public accountant before, it would be wise to hire one. Due to the coronavirus legislation changes, it can be challenging to file your taxes correctly. 

Contact FMA CPA today to speak to a certified public accountant and schedule a free consultation for our business tax and business advisory services today.