Since 1986, there have been more changes in the tax code than days in session of Congress. The federal tax codes are constantly being changed and updated – the impact of which more often than not, continues to widen the racial wealth gap in America. This tax season, we want to set you up for success and give you some game on how you can make your taxes work for you.
The road to wealth is wide and broad, far from being a one-way street and this journey to financial freedom is sure to be different for every individual. A person’s socioeconomic and cultural background can impact their overall financial literacy or knowledge related to obtaining this form of independence. It’s no secret that this road to financial independence for the Black community in America is often paved with difficulty due to systemic and systematic racism in the country. Systemic racism often targets our community through financial barriers or violent actions and can function at a policy level that is then further enacted on an individual level.
According to a CBS news report, Dorothy A. Brown, a professor of law at Emory University and the author of “The Whiteness of Wealth: How the Tax System Impoverishes Black Americans — and How We Can Fix It“, states that what the tax law does every April 15th is see to it that Black Americans pay higher taxes than their white peers. This occurs because while Black and white Americans may engage in the same activity, tax law impacts us differently once we bring our racial identities into our tax forms.
One way to tackle this gap is by continuously extending knowledge and sharing resources to empower and educate the community on financial literacy and tax policies. As more Black entrepreneurs arise, it is even more important to learn the tax benefits that are afforded to business owners, so here are a few income tax deductions that every Black business owner needs to know.
Anytime you spend the night away from your home for business purposes, it is considered business travel. As an entrepreneur or founder, even in this digital work from home/work from anywhere age, traveling for business may at times be a necessity – whether occasional or at high frequency. Regardless, the expenditures can easily be calculated and deducted from your personal return. Whether you are taking a trip 100% dedicated to business or your travels are part business and part pleasure, you can still deduct any expense that specifically relates to your business. Some of these fees and charges may include your flight, rental car, hotel fees, etc.
In today’s work environment, many entrepreneurs are in fact using their homes as their offices. For those who commute to the office, travel from their home to other business-related activities in their personal vehicle can be written off as a deduction. Business activities include but are not limited to business lunches, team meetings, errands, etc. Essentially, any driving you do during the day for business matters can be deemed as a deduction. Therefore, monitoring and keeping records of the mileage accrued is important. You can use software like Everlance to track your driving.
How can you write this off?
- Calculating depreciation, expenses, or mileage
- For every mile, you can deduct 0.58 cents
- For certain vehicles like Tesla’s, Prius, or other electric or hybrid vehicles you will write off the mileage driven – not the gas.
- When expenses increase and exceed the standard deduction, business owners should then cost out incremental charges such as gas.
Did you know your home office can be a tax write-off? Now that a number of work from home entrepreneurs and executives are running their businesses out of their homes, there are a couple of things you need to know. In order to be eligible for a home office deduction you must be:
- Self-employed (no W2’s)
- Work from home
- Have a portion of your home that you use regularly and exclusively for a home office.
There are two options to consider when claiming this deduction:
- Standard option: The standard option determines the total deduction amount based on the percentage of space your office takes up in your home. This amount can be applied to your home utilities, insurance, or mortgage as a business expense.
- Alternative option: $5 per square foot can be applied to the amount of square footage of your home office.
When it comes to the home office, business owners can deduct anything that was purchased for that home office as well as a percentage of their overall expenses.
Other Deductions to Consider
Most of the following deductions categorize personal expenses that are also used for business purposes. Even if you reimburse yourself through your company you can still claim these deductions. Here are some additional deductions that may also apply:
- Personal cell phone: If you pay for your cell phone bill and use that same phone for business, you may qualify for a deduction.
- Business publications: Any subscriptions to business publications such as The Wall Street Journal or the New York Times are expenses that can be written off.
- Professional memberships: If you are a member of a professional organization you can deduct your membership fee, subscription, or fees related to the organization – for example, event tickets. (Read: your Roadmap to Billions ticket is a tax write-off!) Social clubs are not included.
- Real Estate Investments: In certain states, if your real estate investments and accounts are not correctly set up and accounted for, you can lose out on certain deductions. With real estate investments, such as Airbnb, entrepreneurs should be sure to get a good CPA or accounting software as there are many real estate deductions you can take on an annual basis – and we don’t want you to miss out on any of them!
- Qualified Business Income Deduction (Pass-Through Instate Deduction): This deduction primarily applies if your business is an LLC. As a part of the Tax Cuts and Jobs Act, this write-off allows you to deduct the first 20% of your income up to a set amount.
- Qualified Small Business Stock Exclusion: This tax-deductible offsets up to your first $10 million received from the sale of your business.
Tax Benefits for Black Women Business Owners
There are no federal tax breaks that are specifically designed for minority-owned businesses. However, there are several tax incentives, credits, and government programs that directly and indirectly can support underrepresented groups in entrepreneurship such as black women business owners. Here are a few to consider:
- Business Development Opportunities: Each year the federal government sets aside a certain number of contracts for qualifying woman-owned small businesses. Awards can be up to $ 5 million depending on the industry. Your business would need to qualify as either a Women-Owned Small Business (WOSB) or an Economically Disadvantaged Women-Owned Small Business (EDWOSB).
- Government-Sponsored Grants & Loans: Grants and loans are also an option for black women business owners. Two sites to look into are grants.gov and the US government’s “Access Financing”, but also check your state and local-level programs for opportunities.
- Private Grants: Unlike state and federal government tax codes, private organizations may have grants that offer tax advantages to women.
Additional Tax Tidbits You Need to Know
Income Tax Deductions vs Tax Credits
An income tax deduction reduces your taxable income. A credit reduces the tax amount you have to pay. Credits are usually harder to obtain and there are several types available, and they are worth researching. A quick Google search will uncover the type of credits available and help owners determine if the credit applies to their business. We recommend that entrepreneurs and small business owners consult with their CPA.
How to Avoid Being Audited by the IRS
The reason a person might receive a letter in the mail from the IRS may vary, but in many cases, it is for auditing purposes. Here are just a few reasons an individual or business may get audited:
- Deducting more losses than income earned for more than three out of a five-year period.
- If your deductions significantly offset your income, overreporting deductions or underreporting your income can raise red flags.
- If you report losses that exceed your income within a 5-year span, the IRS will view your business as a hobby and might possibly raise flags to audit.
As a new entrepreneur, there is a high probability that your startup will not generate revenue until at least your second year in business. During this time, you will still incur operating expenses. As long as your income exceeds your deductions, you have little to no cause for concern pertaining to an IRS audit.
How do you find a good CPA and Financial Advisor?
When looking for a CPA or financial advisor, it is important to find one who knows the tax laws and benefits for your state as well as your responsibilities and liabilities as a business owner. To find a good CPA or advisor, you can start within your network of trusted friends, and colleagues, and grow with fellow business owners. It is important to note that some CPAs specialize in specific areas, so finding one that is knowledgeable about your niche or business specifically could be worth it. Additionally, when looking for a CPA and/or financial advisor, it is important to be aware of how they accept payment. Financial Advisors can charge on an annual basis or charge for the products they work with. CPAs will typically charge you according to the return.
There are a lot of loopholes and details to consider when thinking about tax benefits related to your business. Due to the endless changes, updates, and layers to the federal tax codes, it can be difficult to know what benefits do and do not apply. Consulting with tax professionals, doing your own research, and utilizing resource guides are key ways to ensure your success. Remember, make your money work for you – Claim your deductions! Owning a business is a wealth generation cheat code, and these are policies created by the government for the people and businesses that will help you level up.