Tax breaks are one of the perks often associated with owning a small business. Saving on your business taxes means you have even more money to put back into your business, or as the owner of the business, in your pockets. But, for many entrepreneurs it can be hard to navigate the complexity of taxes and find ways to save money.
Luckily, there are some relatively easy tax deductions that small business owners may be able to take advantage of in 2023.
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How Do Business Tax Deductions Work?
Business deductions refer to qualified expenses that reduce a business’ total taxable income and therefore reduce business taxes. Most business owners are sole proprietorships or use pass through entities like LLCs, and business income and expenses pass through to their personal income tax returns. Reducing this pass through income can save money on personal taxes and result in a lower tax liability.
This information is for educational purposes only and is subject to change. To understand your specific situation, please consult a tax professional or IRS instructions.
Qualified business deductions are those that are, in the words of the IRS, “…both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business”
In order to take a qualified tax deduction on your business taxes you first need to see what expenses qualify. Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense.
You can’t deduct capital expenses but you may be able to recover the amount you spend through depreciation, amortization, or depletion. In other words you can get a tax benefit over time, rather than immediately.
Once you have confirmed which types of expenses you can deduct it is important to keep a record of qualifying expenses.
Receipts are essential to maintain a record of your qualifying purchases, and they can make an audit easier. Whether you decide to keep a digital record or physical copies, you should have a copy of your records in case something happens to the originals. These backups can be physical copies or digital copies, but either way they are extremely important and should be kept for at least as long as the return can be audited.
It is important to remember that a tax deduction is not the same thing as an income tax credit. While both reduce your tax bill, that is essentially all they have in common.
What Can Be Written Off As Business Expenses?
Remember that business expenses that you write off must follow the ‘ordinary and necessary’ guidelines set by the IRS; the examples below are just examples and may or may not apply to your situation.
This information is for educational purposes only. Please consult your CPA or tax professional, or review IRS instructions, to understand your specific situation.
Here are some of the most popular business tax deductions:
Home Office Deduction
You may be able to deduct expenses for the business use of your home, including mortgage interest, insurance, utilities, repairs, and depreciation. But in order to claim this deduction, you must meet BOTH of the following tests:
- The business part of your home must be used exclusively and regularly for your trade or business.
- The business part of your home must be:
- Your principal place of business;
- A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or
- A separate structure (not attached to your home) used in connection with your trade or business.
There is an optional alternative safe harbor deduction. Instead of using actual expenses, the deduction under the optional method is limited to $1,500 per year based on $5 per square foot for up to 300 square feet.
Car Expenses Deduction
If you use your car exclusively in your business, you can deduct car expenses. But if you are like many small business owners and you use your car for both business and personal purposes, you must divide your expenses based on actual mileage for business use. You can either use actual expenses or the standard mileage rate.
For 2023, the standard mileage rate is 65.5 cents per mile driven for business use.
If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, regardless of whether you claim the standard mileage rate. Keep in mind you generally can’t deduct commuting expenses between your home and your business location. Learn more in IRS Publication 463.
Business Meals Deduction
Generally 50% of the cost of business meals costs (including any tip) are deductible. During the pandemic (2021 and 2022 tax years) this amount rose to 100% for restaurant meals, but it’s back down to 50% starting January 1, 2023.
To qualify, you or an employee must be present, the food or beverages can’t be “lavish or extravagant” and there needs to be a business purpose. The meals must be provided to a current or potential business customer, client, consultant, or similar business associate. Again, they must be ordinary and necessary. Learn more in IRS Publication 463.
Also note that while in the past business meals and entertainment were often deductible, the IRS warns that in general, entertainment expenses are no longer deductible.
If you use proceeds from a small business loan to pay for business expenses, the interest will generally be tax deductible. However, in order to deduct interest on a debt (including a small business credit card), you must be legally liable for the debt, you and the lender intend it will be repaid, and you must have a “true debtor–creditor relationship.” The Tax Cuts and Jobs Act (TCJA) limited the deduction for business interest expense; however it doesn’t apply to certain businesses including those making $26 million or less. Review the latest IRS guidance here.
Insurance can typically be deducted if it’s an ordinary and necessary expense for your business. However some insurance expenses must be capitalized.
Examples of normally deductible insurance includes:
- Business insurance for fire, theft, storms, accidents etc.
- Liability insurance
- Group medical insurance for employees
- Worker’s compensation insurance premiums
- Business interruption insurance
- Malpractice insurance
- Car insurance for vehicles used for business (but not if you take standard mileage deduction)
If you are self-employed, you may be able to deduct insurance for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. If you obtained insurance through the Health Insurance Marketplace, you’ll need to use the worksheet in IRS Publication 974 to calculate your deduction. Otherwise you can use the worksheet in Publication 535.
Note that if you get insurance to secure a small business loan, you can’t deduct the premium. But in the event of death, the policy proceeds won’t be taxed.
Payroll Taxes Deduction
If you pay employees, you’ll not only withhold taxes on their behalf (federal and state income taxes, Medicare and Social Security, for example), but you’ll also pay certain payroll taxes such as federal unemployment taxes (FUTA) or state unemployment taxes (SUTA) and the employer’s share of FICA taxes. You can deduct the employment taxes you must pay from your own funds.
If you are self-employed you pay what’s known as “self-employment tax,” which is the full amount of FICA taxes that are normally split between employer and employee. When calculating your adjusted gross income, you can deduct part of your self-employment tax as a business expense. While this doesn’t reduce your self-employment tax or your net earnings, it can reduce your income tax.
Payroll services can help you manage payroll and often payroll taxes as well.
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Other Deductible Taxes
Other taxes you may be able to deduct include:
- Excise taxes
- Franchise taxes
- Occupational taxes
- Personal property taxes
- Sales tax
This is by no means a comprehensive list of all the potential write offs for a business, just as it isn’t a list of what you are guaranteed to be able to write off.
Each of the items mentioned, along with those not mentioned, have specific rules regarding the circumstances under which they can be deducted and the amount a business is able to deduct.
Working with a tax professional is always a good idea but if you elect not to at least make sure you go to the IRS’ website and read the rules regarding the different types of deductions carefully. Start with Publication 535, which will reference other publications for specific deductions.
What if you use something for both business and personal expenses? (An example might be a cell phone you use for business and personal use.) Generally, you cannot deduct personal, living, or family expenses. But if you have an expense for something used partly for business and partly for personal purposes, you can divide the total cost between the business and personal use.
How Much Can A New Business Write Off?
You may be able to write off some or all of your startup business expenses but you’ll need to follow IRS rules and limitations, which are spelled out in IRS Publication 535, Business Expenses.
Typically the costs of getting started in business, before you actually begin business operations, are capital expenses. Capital expenses are spread out over time (15 years), and not deducted in the first year.
You can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Any costs not deducted can be amortized over 180-months, beginning with the month you begin business. These include:
- A business start-up cost.
- An organizational cost for a corporation.
- An organizational cost for a partnership.
You can deduct up to $5000 in startup costs— generally costs a business could deduct if they were starting an active business. You can also deduct up to $5000 in organizational costs for forming your business entity.
But that deduction is reduced dollar for dollar if your startup expenditures exceed $50,000.
To elect to amortize start-up or organizational costs, you must complete and attach IRS Form 4562 to your return for the first tax year you are in business.
If you are going to spend money investing in your business, it’s important that you understand your options for writing off startup costs and keep good records.
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What Will The Standard Deduction Be For 2023?
Standard deductions apply to personal tax returns, not businesses. But again, even though small business owners may file small business tax returns, business income and expenses often flow through to the business owner’s personal return.
That makes standard deductions just as important to business owners, freelancers and independent contractors as it is to individual filers.
For married couples filing jointly, the standard deduction for 2023 will be $27,700, for single taxpayers and those that are married but filing separately it is $13,850, and the head of households can take a standard deduction of $20,800. Also for 2023, the highest tax rate is 37% while the lowest is 12%.
In addition, taxpayers who own businesses may be entitled to a deduction of up to 20% of their net QBI from a trade or business, including income from a pass-through entity, but not from a C corporation, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
While S Corporations and partnerships aren’t eligible for the deduction, they will provide information for shareholders or partners on or with Schedule K-1 so business owners who qualify may be able to take the deduction.
If your 2022 taxable income before the QBI deduction is less than or equal to $170,050 if single, married filing separately, head of household, qualifying surviving spouse, or are a trust or estate— or $340,100 if married filing jointly— then you’ll generally use IRS Form 8995 to figure your deduction. Otherwise, use IRS form 8995-A. As with all things involving tax laws, there are additional guidelines that apply so review the IRS publication or talk to your tax professional.
Is Section 179 Still In Effect For 2023?
Yes, section 179 is still in effect for 2023. For those that are unfamiliar with Section 179, it is a provision in the tax code that allows businesses to purchase certain types of tangible personal property and deduct some or all of the cost in the year it was put into service, instead of depreciating it over time.
Under Section 179, you may be able to deduct property such as equipment, machinery, furniture, vehicles or buildings (but not land). Your business may also be able to depreciate some types of intangible property, such as computer software, copyrights or patents, copyrights.
For tax years starting in 2022, the maximum section 179 expense deduction is $1,080,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,700,000. The maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2022 is $27,000 and the total Section 179 deduction and depreciation you can deduct for a passenger automobile (including a truck or van) used in your business and first placed in service in 2021 is $18,200 or $10,200, depending if the special depreciation allowance applies.
Will There Be Bonus Depreciation In 2023?
Yes, bonus depreciation will still be available in 2023 but it will decline from the previous year. It’s scheduled to be phased out by 2027, which means it will decrease by 20% each year. That means it decreases to 80% for assets placed into service in 2023.
Bonus depreciation allows qualifying businesses to take additional depreciation on new and used equipment, as long as the used equipment is new to the business taking the bonus depreciation.
Even though the depreciation percentage will be decreasing, businesses can still reap significant benefits, and unlike Section 179 most purchases aren’t capped at a specific dollar amount.
Will Tax Refunds Be Bigger In 2023?
It is hard to know whether a business owners’ tax return will be bigger or smaller in 2023 as there are many factors that determine the value of the refund. The IRS has warned taxpayers that refunds may not be as large in 2023 due to the end of stimulus checks, as well as the inability to deduct charitable contributions if you take the standard deduction.
Still, business owners often find they can take advantage of a variety of tax deductions to reduce the amount owed.
Work with a tax professional, or use business tax preparation software, to help ensure you take the maximum deductions available to you.