Federal Tax Relief for Companies & Business Owners

Here are some of the most popular and helpful tax breaks for businesses (continued from Part 1 of this series), with information provided by IRS news releases, notices, and related reports.

Tax Deduction for Charitable Contributions

The Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) of 2020 temporarily increased the income limits for corporations that make certain qualified charitable contributions during the 2021 calendar year.

100% Limit for Charitable Cash Contributions for Disaster Relief

Corporations may qualify for the new 100% limit for disaster relief contributions as well as a temporary waiver of the recordkeeping requirement. The TCDTRA temporarily increased the limit (to up to 100% of a corporation’s taxable income) for contributions paid in cash for relief efforts in qualified disaster areas. Qualified disaster areas are those in which a major disaster has been declared under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. (For a list of disaster declarations, visit FEMA.gov.) To be eligible, the corporation must pay qualified contributions during the period beginning on January 1, 2020 and ending on February 25, 2021. A corporation elects the increased limit by computing its deductible amount of qualified contributions using the increased limit, and by claiming the amount on its return for the tax year in which the contribution was made.

25% Limit for Charitable Cash Contributions

The TCDTRA allows C corporations to apply an increased limit (a.k.a. “Increased Corporate Limit”) of 25% of taxable income for charitable contributions of cash they make to eligible charities during 2021. The Increased Corporate Limit does not apply automatically. C corporations must elect the Increased Corporate Limit on a contribution-by-contribution basis.

25% Limit for Charitable Food Contributions

There is also a temporarily increased limit on the amounts deductible by businesses for certain donated food inventory. Businesses donating food inventory that are eligible for the existing enhanced deduction (for contributions for the care of the ill, needy, and infants) may qualify for these increased deduction limits. For contributions made in 2021, the limit for these contribution deductions is increased from 15% to 25%. For C corporations, the 25% limit is based on their taxable income. For other businesses (including sole proprietorships, partnerships, and S corporations), the limit is based on their aggregate net income for the year from all trades or businesses from which the contributions are made. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.

RELATED: Tax Strategies for Charitable Donations

Home Office Tax Deduction

While the Coronavirus pandemic forced many Americans to work from home, only certain individuals will qualify to claim the Home Office Deduction. This tax deduction allows qualifying taxpayers to deduct certain home expenses on their 1040 tax return when they file their 2021 tax return (due by April 15, 2022).

Here are some things to help you understand the Home Office Deduction and whether you can claim it:

• Employees are not eligible to claim the home office deduction
• The home office deduction (reported on Form 8829) is available to both homeowners and renters
• There are certain expenses taxpayers can deduct – they include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent
• Taxpayers must meet specific requirements to claim home expenses as a deduction –even then, the deductible amount of these types of expenses may be limited

The term “home” for purposes of this tax deduction:

• Includes a house, apartment, condominium, mobile home, boat, or similar property that provides basic living accommodations
• A separate structure on the property such as an unattached garage, studio, barn, or greenhouse
  • Any portion of a home used exclusively as a hotel, motel, inn, or similar establishment does NOT qualify as a “home” and, therefore, does not qualify for a home office deduction

Generally, there are two basic requirements for the taxpayer’s home to qualify as a deduction. First, there must be “exclusive use of a portion of the home for conducting business on a regular basis.” (For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.) Second, the home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties.

Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:

• The Simplified Method – Consisting of a rate of $5 per square foot for business use of the home, which is limited to a maximum size of 300 square feet and a maximum deduction $1,500.
• The Regular Method – Whereby deductions for a home office are based on the percentage of the home devoted to business use. Any use a whole room or part of a room for conducting their business will involve figuring out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

For more information, see IRS Publication 587: Business Use of Your Home.

RELATED: Top COVID-Relief Tax Breaks

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