You work hard enough to ensure that your small business survives, and you don’t want to overlook any potential tax deductions that can maximize your savings.
In this article, we’ll cover the most important small business tax changes for 2023 and also provide information about solar energy installation credits and EV vehicle credits. Then, we’ll list all possible tax write-offs you can use, whether you’re a sole proprietor or running a small business with employees.
Remember that different deductions are available depending on your business’s structure – sole proprietorship, LLC, S-Corp or other classification.
Let’s dig right in and help you maximize potential benefits. We’ll start with a list of key changes for 2023, provide updated information about solar energy installations, and then list the top 25 tax deductions for small businesses.
IRS Reports Small Business Tax Changes for 2023
Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax is $160,200 for 2023. There is no maximum limit on earnings subject to the Medicare part.
Standard mileage rate. For 2023, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use during 2023 increased to 65.5 cents a mile.
Redesigned Form 1040-SS. For 2023, Schedule(s) C and SE (Form 1040) are available to be filed with Form 1040-SS, if applicable. For additional information, see the Instructions for Form 1040-SS.
Bonus depreciation. The bonus depreciation deduction under section 168(k) begins its phaseout in 2023 with a reduction of the applicable limit from 100% to 80%.
Form 7205, Energy efficient commercial buildings deduction. This form and its separate instructions are used to claim the section 179D deduction for qualifying energy efficient commercial building expenses that are now reported on new line 27b of Schedule C (Form 1040). See Form 7205 and its instructions for more information.
Commercial clean vehicle credit. Businesses that buy a qualified commercial clean vehicle may qualify for a clean vehicle tax credit. See Form 8936 and its instructions for more information.
Business meal expense. The temporary 100% deduction for business meal expenses has expired. The business meal deduction reverts back to the previous 50% allowable deduction beginning January 1, 2023.
Did You Install Solar Energy?
There are two types of tax credits available for small business owners who installed solar energy.
They are:
The Investment Tax Credit (ITC)
The ITC is a tax credit that reduces the federal income tax liability for a percentage of the cost of a solar system that is installed during the tax year. For 2023, as long as the project meets federal labor requirements, that’s a 30% of the cost tax credit.
The production tax credit (PTC)
The PTC is a per kilowatt-hour (kWh) tax credit for electricity generated by solar and other qualifying technologies for the first 10 years of a system’s operation. It reduces the federal income tax liability and is adjusted annually for inflation. In other words, check for the latest update on that number.
In general, solar systems that were placed in service in 2022 or later and begin construction before 2033 are eligible for a 30% ITC or a 2.75 ¢/kWh PTC if they meet labor requirements issued by the Treasury Department or are under 1 megawatt (MW) in size.
Top Tax Deductions for Small Business
Tax-deductible business expenses can help reduce your annual tax liability, so it’s important to know what deductions are available. Here are the top 25 small business tax deductions:
1. Home Office Deduction
If you use a portion of your home exclusively for business, then you can often claim the associated expenses, such as utilities, repairs, and insurance, as home office deductions. You can also deduct a portion of your rent or mortgage payments. This is calculated using a percentage – for example, if your home is 1,000 square feet and you use a 100-square-foot office, you can deduct 10% of your home expenses, such as mortgage payments and utilities.
2. Real Estate Taxes
If you own a business property, such as an office or retail store, then you can claim the associated real estate taxes as a tax deduction. You’ll need to provide proof of payment, such as a receipt or bank statement.
3. Business Meals
Meals consumed while conducting business can be deducted as long as they are reasonable. This includes meals with employees, clients, and vendors. In order to qualify for the deduction, the meal must be directly related to business and not personal in nature. However, for 2023, the deduction for meals was cut from 100% to 50% of the cost of the meal.
4. Legal and Professional Fees
Fees paid to attorneys, accountants, and other professional services can be deducted as business expenses. Services such as filing fees, audits, and incorporation costs can also be deducted.
5. Business Property Rental
Any rental payments for business property such as an office, warehouse, or equipment can be deducted. For example, if you’re a contractor and you lease a storage unit for supplies and tools, you can deduct that as a business expense. You’ll need to provide a lease agreement or rental receipt as your proof of payment. While you can’t deduct the total amount of your rent, you can deduct a portion that is equal to your business use.
6. Mortgage Interest
If you own a business property, you can claim the associated mortgage interest as a business expense and tax deduction. The deduction is limited to the amount of your loan’s principal balance and the associated interest rate.
7. Health Insurance Premiums
If you pay health insurance premiums for yourself or your employees, these can be deducted as a business expense. Note that in some cases, the IRS may limit the amount you can deduct, so it’s best to check with your tax advisor first.
8. Business Education Expenses
If you attend a seminar or take classes related to your business, the associated costs can be deducted as a business expense. This includes tuition, registration fees, and travel expenses. Online courses can also be deducted.
9. Internet Expenses
Do you pay for an internet connection for your business? If so, then the associated fees can be deducted. This includes monthly charges, equipment rental fees, and installation fees. Since every business is online these days, this deduction can be quite helpful.
10. Business Equipment
If you purchase business equipment, such as computers or furniture, the cost can be deducted. You may also be able to deduct any associated repair and maintenance costs. Make sure to keep your receipts and documentation.
11. Business Insurance Premiums
The cost of business insurance premiums can be deducted as a business expense. This includes liability, property, and life insurance. Note that some types of insurance may only be deductible if they are related directly to your business operations.
12. Business Travel Expenses
If you travel for business purposes, then the associated expenses can be deducted. This includes airfare, hotel stays, car rentals, and meals. Be sure to keep all receipts and documentation for your trips in case the IRS requests it.
13. Office Supplies Business Expense
Office supplies like paper, ink, and toner are all deductible business expenses. You can also deduct the cost of any other supplies that you use for your business, such as invoices and stationery.
14. Advertising & Marketing Costs
Advertising and marketing costs related to promoting your business, such as website design, can be deducted. This includes the cost of business cards, flyers, and other promotional materials. Online marketing expenses can also be deducted.
15. Phone Expenses
The cost of your business phone and associated charges can be deducted as a business expense. This includes cellular bills, landline charges, and long-distance calls. You may also be able to deduct any extra costs for business-specific features, such as a dedicated fax line.
16. Business Vehicle Expenses
Does your business have a company car or truck? If so, then the associated fuel and maintenance costs can be deducted. You can also deduct any mileage that is related to business trips. If your business has a fleet of vehicles, then this deduction can add up quickly. If you’re a sole proprietor and your vehicle is for both personal and business use, you can claim the mileage, but you must have accurate records detailing when the vehicle was used specifically for business.
17. Employee Compensation
If you have employees, then the cost of their salaries and wages can be deducted. You’ll also need to deduct any other compensation that is provided, such as bonuses and stock options. Be sure to comply with all applicable tax laws when deducting employee compensation.
18. Startup Costs
If your business is new, then you may be able to deduct the cost of launching it. This includes legal fees, accounting expenses, and other costs associated with setting up your business. Make sure to keep all of your receipts and documentation for this deduction as well.
19. Professional Service Fees
The cost of hiring a professional such as an accountant or lawyer is deductible. This includes any fees associated with filing taxes. It also includes any fees for legal advice or representation for any business-related matters, such as a contract review. Hiring a professional can save you time and money in the long run, so make sure to take advantage of this deduction.
20. Retirement Contributions
Contributions to a retirement plan for yourself and your employees can be deducted. This includes contributions to 401(k)s, IRAs, and other types of retirement plans. This deduction can help you save for your future and also provide benefits for your employees. These deductions are specific by state and can be found at the Small Business Administration website (http://sba.gov/business-guide/manage-you-business/pay-taxes.)
21. Bad Business Debt
Any debt that is deemed uncollectible can be deducted. This includes any money that is owed to you by customers or vendors but cannot be collected. This deduction can help offset any losses that your business may have incurred due to bad debt.
22. State Tax Deductions
Deductions on state and local taxes for businesses can vary from state to state, so be sure to check with your local tax authority for more information. Some states offer deductions on sales taxes or income taxes, while others have specific deductions that apply to certain industries. Make sure to take advantage of any available state tax deductions in order to reduce your business’s taxable income.
23. Employee and Client Gifts
If you give out client gifts or provide employee perks, such as holiday bonuses, those expenses can be deducted. This includes any items that are given out in appreciation of a job well done, such as gift cards or dinner vouchers. Just make sure to keep track of all gifts and bonuses to ensure that you take advantage of the deduction.
24. Foreign Earned Income Exclusion
If your business earns income in a foreign country, then you may be able to take advantage of the foreign-earned income exclusion. This can help reduce the amount of taxable income that you owe on your business earnings.
25. Charitable Contributions
Any donations that you make to a qualified charity can be deducted. This could include money, goods, or services that you provide to a charitable organization. Charitable giving can help to support a good cause while also providing you with a tax break.
Tips for Documentation and Record-Keeping
Effective documentation and record-keeping are pivotal for maximizing tax deductions. It’s essential to maintain organized records of all business-related expenses throughout the year. Utilize digital tools or accounting software to track expenses in real time.
Keep digital or physical copies of all receipts, invoices, and bank statements. Categorize expenses for easier reference and ensure that each expense is substantiated with appropriate documentation. Regularly reviewing and updating your records can significantly ease the tax filing process and support your deduction claims.
Common Mistakes to Avoid
Common mistakes in claiming tax deductions can lead to missed opportunities or, worse, trigger audits. One frequent error is the commingling of personal and business expenses.
That’s why often the first advice given to new small business owners is to start a business bank account and obtain a business credit card. Any fees related to banking services, such as wire transfers and international transactions, can be deducted. This includes any monthly or annual fees that you may be charged for having a business bank account. Be sure to keep track of any fees that you incur so that you can deduct them at tax time.
Overestimating deductions is another pitfall; only claim deductions for expenses that are ordinary and necessary for your business.
Neglecting to track small expenses or failing to stay updated on tax law changes can also result in losing out on valuable deductions. Being meticulous and conservative in your approach can help avoid these common mistakes.
Impact of Deductions on Overall Tax Strategy
The strategic use of tax deductions should be an integral part of your overall business tax strategy. Deductions can significantly lower taxable income and, consequently, the tax liability.
However, it’s crucial to understand how these deductions align with your business goals and financial plans. For instance, investing in equipment or technology may provide immediate deductions, but consider how these investments contribute to long-term business growth.
Also, assess how deductions like home office or vehicle expenses fit into your broader financial picture. A holistic approach to tax planning can optimize financial outcomes for your business.
Don’t forget you can use the latest accounting software for small business to find out what your tax liabilities are for the year.
Utilizing Professional Tax Assistance
Navigating the complexities of tax deductions can be challenging, especially for small business owners who juggle multiple responsibilities. Professional tax assistance can be invaluable in this regard.
Tax professionals can provide expert advice tailored to your specific business needs, ensuring you take advantage of all eligible deductions while remaining compliant with tax laws.
They can also offer strategic guidance on tax planning and help you prepare for future tax years. Investing in professional tax services can lead to significant long-term benefits for your business, including potential savings and reduced risk of errors.
How to Claim Small Business Tax Deductions
When it comes to claiming deductions on your small business income taxes, there are a few key things to keep in mind. Here is a step-by-step guide on exactly how to claim small business tax deductions:
Step 1: Gather the necessary documents
Before you start claiming deductions, make sure to gather all necessary documents, such as receipts or invoices for any expenses you are deducting.
Step 2: Fill out the appropriate tax forms
You will need to fill out all of the appropriate tax forms in order to claim deductions. This may include business income tax forms, as well as any state-specific tax forms.
Step 3: Calculate deductions
Once you have all the necessary paperwork in place, you can begin to calculate your deductions. This includes calculating all applicable business expenses, as well as any state or federal credits that may be available.
Step 4: File taxes
After calculating your deductions, you can file your income taxes using the appropriate forms. Make sure to double-check all information to avoid any issues with incorrect filings. It is important to learn as much as possible about how to file self-employment taxes if you are doing it yourself.
Step 5: Submit taxes
Once the tax forms are completed and filed, you can submit them to the IRS. After submitting, you should receive a confirmation that your taxes have been processed.
It is also worth noting the top small business tax mistakes owners make when they file so you can learn from their mistakes.
Here’s a comparison table of the above steps for quick and easy reference:
| Step Number | Action | Description |
|---|---|---|
| 1 | Gather the necessary documents | Before deducting any expenses, compile essential documents such as receipts or invoices. |
| 2 | Fill out the appropriate tax forms | Complete the required tax forms, which might encompass business income tax forms and any state-specific ones. |
| 3 | Calculate deductions | After collecting all necessary documentation, start computing your deductions. This entails tallying all relevant business expenses and identifying available state or federal credits. |
| 4 | File taxes | Once your deductions are calculated, file your income taxes using the relevant forms. Double-check every detail to prevent mistakes, and if self-filing, ensure you’re well-versed in how to file self-employment taxes. |
| 5 | Submit taxes | With your tax forms filled and checked, send them off to the IRS. Await a confirmation signifying the successful processing of your submission. It is also worth noting the top small business tax mistakes owners make when they file so you can learn from their mistakes. |
How to Maximize Your Tax Deductions and Cut Your Taxable Income
Tax deductions are an important way to reduce your taxable income and save money. With the right strategy, you can maximize your deductions and reduce your tax burden. Here are five ways to maximize tax deductions:
- Track all of your business expenses. If you want to maximize your deductions, you need to make sure you track any and all business expenses throughout the year. This includes anything from office supplies to travel expenses.
- Take advantage of deductions for self-employed individuals. If you are self-employed, you may be eligible for a variety of deductions, such as the self-employed health insurance deduction and the home office deduction.
- Look for any available state tax deductions. Many states offer additional deductions for businesses, such as research and development credits or sales tax deductions.
- Make sure to keep accurate records. Accurate records are essential for claiming any deductions. Make sure to keep track of all expenses, such as receipts and invoices.
- Consult with a tax professional. If you’re unsure how to maximize your deductions, it can be helpful to consult with a tax professional who can give you tailored advice.
FAQ
What is the section 163(j) limitation on the deduction for business interest expense?
Generally, taxpayers can deduct interest expenses paid or accrued in the taxable year. However, if the section 163(j) limitation applies, the amount of deductible business interest expense in a taxable year cannot exceed the sum of:
- the taxpayer’s business interest income for the taxable year;
- 30% of the taxpayer’s adjusted taxable income (ATI) for the taxable year; and
- the taxpayer’s floor plan financing interest expense for the taxable year.
What’s going on with Net Loss Deductions?
The Tax Cuts and Jobs Act (TCJA), section 11012, as amended by the CARES Act, section 2304, and as further amended by the Inflation Reduction Act, section 13903, revised section 461(l) to limit the amount of losses from the trades or businesses of noncorporate taxpayers that the taxpayer can claim each year, beginning after 2020 and ending before 2029. You can’t deduct net losses in excess of a threshold amount in the current year. The amount of the excess business loss is treated as an NOL for the current year for purposes of determining any NOL carryover for later tax years. You’d use IRS Form 461 to figure the excess business loss.
Standard Deductions vs. Itemized Deductions?
Standard deductions are a set amount that taxpayers can deduct from their taxable income to reduce overall tax liability. This deduction is available to those who do not itemize their deductions on their tax return. For 2023, the standard deduction for a single filer is $14,600.
Itemized deductions are a list of expenses that can be used to reduce your taxable income if the total of the expenses is more than your standard deduction. Itemized deductions include medical bills, charitable donations, mortgage interest payments, and more.
Tax Deductions vs Tax Credits?
Tax deductions are an important tool for reducing one’s taxable income and the amount of taxes one must pay. They are different from tax credits, which are a dollar-for-dollar reduction in taxes owed.
Tax deductions reduce the amount of taxable income subject to tax, while tax credits reduce the total amount of taxes paid. It is important to understand the difference between these two types of tax relief in order to maximize your savings.
What is the 20% Business Tax Deduction?
That’s the qualified business income deduction (QBI). The QBI is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes.
In general, total taxable income in 2023 must be under $182,100 for single filers or $364,200 for joint filers to qualify.
This deduction applies to businesses that are organized as pass-through entities, such as sole proprietorships, partnerships, and S-corporations. The deduction is based on the business’s net income from taxable activities and is limited by a variety of factors, such as the type of business, wages paid to employees, and the number of capital investments.
What types of business expenses are tax deductible without receipts?
Navigating the world of business expenses can be complex, especially when it comes to determining which costs are tax deductible without physical proof like receipts. The IRS understands the challenges businesses face and, thus, allows for the deduction of certain expenses even in the absence of receipt documentation. This provision, however, should be exercised with caution, ensuring that the expenses claimed are legitimate and justifiable.
Some business expenses that can typically be deducted without receipts include:
- Transportation: Costs associated with business-related travel, such as mileage or fuel for company vehicles.
- Office Supplies: Items like pens, paper, or other common supplies used in daily operations.
- Tools & Equipment: Essential tools or machinery required for business processes or services.
- Professional Services: Fees paid to professionals, including accountants or legal consultants.
- Marketing & Advertising: Expenses related to promoting the business, like online advertisements, brochures, or promotional events.
While these categories offer some flexibility, it’s still advisable for businesses to maintain thorough documentation whenever possible. Keeping organized records, even in the absence of receipts, can provide support during tax audits or financial reviews.
Businesses can still deduct certain expenses without needing receipts as evidence. Basic costs such as transportation, office supplies, and tools, services such as accountant fees, and marketing can be deducted without needing receipts.
What is the maximum tax refund you can get?
The maximum tax refund you can get is largely dependent on your individual income and filing status. Generally, the more money you make and the more deductions you take, the higher your refund amount will be. Additionally, tax credits and deductions can significantly increase your refund amount. Your best bet for maximizing your refund is to consult a tax professional who can provide you with tailored advice for your individual situation.
How can you lower your income tax?
There are several strategies you can use to lower your income tax bill. First, maximize deductions by tracking all of your business expenses and taking advantage of any applicable tax credits or deductions. Second, consider restructuring your business to take advantage of lower tax rates for entities such as S-corporations or LLCs. Finally, consider contributing to a retirement plan such as an IRA, 401(k), or SEP-IRA. These contributions can be deducted from your taxable income, reducing your overall tax liability.
How much can an LLC write off?
The amount an LLC can write off depends on the type of deductions it is taking. Generally, business expenses such as advertising costs, employee salaries, and office supplies are fully deductible. Additionally, LLCs may be eligible for various tax credits and deductions, such as the 20% business tax deduction discussed above. Consult a tax professional to determine the exact amount you can write off.
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