Navigating the financial landscape as a small business owner can be daunting, especially when it comes to taxation. However, the key to optimizing your tax return lies in understanding the new tax deductions available to a small business this year and beyond. These deductions can substantially reduce your taxable income, significantly impacting your bottom line.
This article will guide you through these latest deductions, helping you make informed decisions that could save your business a lot of money. That way, you can ensure that your business complies with the latest tax regulations and take advantage of every deduction available.
The Main Types of Startup Expenses
When starting a business, owners may incur various expenses related to creating and launching their enterprise. These expenses are often beneficial for tax purposes, as they can be deducted from your taxable income.
Business Creation Costs
The costs related to business creation primarily include:
- Market research: Understanding your target market and potential customer base.
- Product analysis and testing: Evaluating your product’s or service’s viability and functionality.
- Feasibility studies: Assessing the potential success and practicality of your business idea.
- Competitor analysis: Analyzing your competition to determine your business’s unique selling proposition.
- Labor studies: Evaluating the labor market, including wages and employment trends.
- Location scouting and prospecting costs: Identifying and assessing potential business locations.
Costs to Launch Your Business
The costs associated with launching your business typically include:
- Hiring and training new employees: Recruiting, onboarding, and training your workforce.
- Business licenses and permits: Obtaining legal permissions to operate your business.
- Technology costs: Purchasing essential technology such as computers, software, and machines.
- Costs of borrowing: Interest accrued on business loans or business expenses.
- Marketing, advertising, and promotion: Building awareness and promoting your product or service.
- Supplies and equipment: Purchasing necessary supplies and equipment for your business.
- Inventory costs: Procuring stock of products to be sold.
- Insurance costs: Protecting your business through various insurance policies.
- Rent or lease costs: Cost of the physical location of your business.
- Business travel costs: Expenses related to business-related trips.
- Utilities: Costs for services like water, electricity, and internet.
Organizational Costs
Aside from the costs related to creating and launching your business, there are also organizational costs that you may encounter. These include:
- Legal fees: Costs associated with legal consultations or proceedings.
- Incorporation fees: Costs related to forming a corporation.
- State and federal fees: Various fees are required by state and federal entities.
- Consultant fees: Costs of hiring experts for advice and guidance.
- Professional fees: Costs associated with hiring professionals such as accountants or attorneys.
- Expenses related to meetings: Costs associated with meetings conducted to organize the business.
Remember that these costs are generally tax-deductible, providing small businesses valuable opportunities to lessen their tax burdens.
15 Tax Deductions and Benefits for Small Businesses
If you’re a new business owner, it’s important to be aware of specific tax deductions and benefits that could greatly benefit you. Let’s look at the 15 tax deductions and benefits available for a small business in 2023.
Self-Employment Tax
If you’re self-employed, you’re responsible for paying your Social Security and Medicare taxes (FICA), typically self-employment tax. Fortunately, you can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income.
You split this rate with your employer as a freelancer or independent contractor. However, if you’re self-employed, you’re responsible for the entire amount, which is 15.3%. If your income exceeds certain thresholds, there are additional premiums to consider, and your marital status can also affect the rate you pay.
Utilities, Phone, and Internet
Business-related utility costs, such as electricity, water, phone, and internet services, are fully deductible. However, only the portion used for business can be claimed if these services are used for personal and business purposes.
You can also deduct these expenses as business expenses. However, if the accounts are shared with your household, you will only deduct the portion related to your business. On the other hand, if you have a dedicated line exclusively for your business, it is fully deductible.
Rental or Lease Costs
The cost of renting or leasing a commercial property for your business is fully deductible. This includes offices, retail spaces, warehouses, and any other rented property used for business purposes.
All costs associated with renting or leasing business premises or equipment are fully deductible. However, it’s important to note that you cannot deduct rental costs for your properties.
Home Office Expenses
If you use part of your home exclusively for your business, you may be able to deduct expenses related to that part. This includes a portion of your rent or mortgage payment, as well as costs associated with utilities and necessary repairs.
You can deduct a portion of the expenses related to your residence, such as mortgage payments, interest, insurance, repairs, utilities, and more. If you allocate 20% of your home for business purposes, you are eligible to deduct the same 20% of these costs. The space you use for your business doesn’t have to be a separate room but should be dedicated solely to your business.
Insurance Premiums
Premiums for business insurance policies are generally fully deductible. This includes coverage for property, liability, worker’s compensation, professional liability, and even business vehicle insurance.
Liability, car insurance for business vehicles, fire insurance, and flood insurance are all eligible for deductions. Health insurance premiums can be deducted if not paid by an employer, whether yours or your spouse’s. If you cover the insurance for your spouse and children under your policy, you can also claim a deduction.
Interest on Business Expenses
Interest paid on business loans, credit cards, or lines of credit used for business purposes can be deducted from your taxable income. This encompasses loans and corporate credit cards, allowing you to deduct interest expenses for the 2021 tax year up to 30% of your taxable income.
Subscriptions
Subscriptions to business-related magazines, online services, databases, and professional organizations can be deducted. This covers trade publications, magazines, journals, books, or other materials directly relevant to your business operations.
Training and Education
Training and education expenses related to improving your or your employees’ skills in your current business can be deducted. These expenses can be deducted as long as they are directly related to enhancing or upgrading your existing business focus.
Advertising Costs
The costs of advertising and promoting your business and its products or services are fully deductible. This includes various marketing channels such as social media ads, print ads, posters, and mail.
Business Meals
Deductions have undergone some changes in recent years. Currently, when it comes to meals during travel, conferences, or client entertainment, they are fully covered as long as a restaurant provides them. Simply put, you cannot claim a tax deduction for the pizza you eat at your desk. On the other hand, 50% of the cost of business meals can be deducted, provided that the meal is either with a client, customer, or employee and business matters are discussed.
Business Travel Expenses
Travel expenses related to your business, such as airfare, lodging, and meals, are deductions. However, the travel must be primarily for business purposes. These expenses are fully deductible, except for meals, which can be deducted at 50%. The trip should have a clear business purpose and take place outside the area where your business or home is located. Allowable expenses encompass transportation to and from the destination, taxis, rental cars, lodging, and meals.
Vehicle Use
If you use your vehicle for business, you can claim a deduction for business mileage or vehicle expenses. You can deduct the entire ownership and operational costs if your car is solely for business use costs. However, if you occasionally use your car for business, you can only deduct the portion used for business. Maintaining accurate records is crucial as it helps determine what expenses are eligible for deduction, benefiting you and your accountant.
There are two ways to claim vehicle use deductions: the standard mileage rate method and the actual expense method. Under the standard mileage method, you can deduct 56 cents per mile. However, there are a few exceptions where the standard mileage rate cannot be used, such as if you have more than five cars or have claimed certain depreciation tax deductions. Consider these factors when considering which method to use for your deductions.
If you meet the criteria for both methods, compute each deduction and choose the one that provides the greater deduction.
The IRS permits additional deductions for vehicle expenses that you can claim as write-offs:
- Licensing and registration fees
- Lease payments and the interest associated with them
- Fuel costs
- Toll fees and parking expenses
- Garage rental fees
- Insurance premiums
- Repair costs
- Tire replacements
- Depreciation
- Maintenance expenses (e.g., car washes and detailing)
Depreciation
You can deduct the cost of business property over its expected life, known as depreciation. This could apply to office furniture, equipment, and even buildings. When purchasing equipment, machinery, or other assets for your business, it’s important to note that you cannot deduct the entire cost of the item in the first year.
However, you can take advantage of tax deductions for depreciation each year by using IRS Form 4562. It’s important to remember that a separate form must be filed for each asset, and it’s not possible to include investment property or property owned outside of the US.
Retirement Plan Contributions
Contributions made to retirement plans for yourself and your employees can be deducted. However, there are limits on the amount that can be contributed and deducted each year. Contributions to retirement plans are fully tax-deductible, subject to annual limits. These plans must meet IRS requirements and be tax-qualified.
The categories include a range of options, such as:
- Roth IRA
- SIMPLE IRA
- SEP IRA
- Keogh plan
Health Insurance Premiums
Health insurance premiums paid for yourself, your spouse, or your dependents can be deducted from your taxes. This includes premiums for medical care, dental care, and long-term care insurance. Suppose you are self-employed and have a net profit for the year, or a partner in a partnership or a shareholder owning more than 2% of an S corporation. In that case, you may be eligible for the self-employed health insurance deduction.
This deduction can also be taken for premiums paid to cover an adult child under age 27 at the end of the year, even if the child is not your dependent. However, this deduction isn’t available if you are eligible to participate in a health plan maintained by your employer or your spouse’s employer. Always consult with a tax advisor to fully understand the implications and your eligibility.
It’s also important to note that the self-employed health insurance deduction is taken as an adjustment to income. This means it’s taken into account in calculating your adjusted gross income. Consequently, it does not count as an itemized deduction, and it can be taken even if you don’t itemize deductions on your return.
This deduction can be particularly beneficial because it reduces your adjusted gross income, which, in turn, reduces your taxable income and potentially increases other tax breaks (such as tax credits and deductions that are phased out based on levels of adjusted gross income).
How to Deduct New Small Business Expenses on Your Taxes
Now that you have gained insights about the possible tax deductions as a new small business owner let’s dive deep into how to claim these benefits and answer any queries you might encounter.
Which Forms are Required for Claiming Deductions?
The forms you’ll need to fill out for claiming startup operational cost deductions in your initial filing will hinge on your business structure. Part V of Schedule C (Form 1040 or 1040-SR) is needed for sole proprietors, while partnerships or S-corps should use Schedule K-1 (Form 1065), and corporations require Form 1120.
Alternatively, if you plan to amortize your expenses, you should utilize IRS Form 4562. As this decision is irreversible, you should consult your tax advisor before proceeding.
How To Determine My Business’s Start Date?
Determining your business start date is pivotal for tax purposes, as it influences whether certain startup costs are deductible. To qualify, these costs must be incurred prior to your start date.
Your start date is the day you officially registered your business. However, if your business is a corporation, your start date is considered to be the day of incorporation.
What If I Don’t Establish a Business?
Can those costs still be deducted from my taxes? Even the most promising ideas don’t always come to fruition as planned. In such scenarios, there are two possible outcomes:
If the business has not been legally established and your expenses are associated with preliminary investigations, due diligence, or research, they cannot be deducted as business expenses.
If your business launch did not succeed, your startup costs could be claimed or depreciated as though the business was operational.
Streamline Payment Processing with ReliaBills
Apart from the deductions available for a small business, it’s also important to ensure you get paid for your services once you begin operations. Utilizing an automated payment platform like ReliaBills helps make this process much more straightforward and far less time-consuming. That way, you can focus on running your business while we handle all the payment processing.
ReliaBills is a cloud-based invoicing and billing software designed to automate payment processes, reduce administrative overhead, and streamline payment processing duties. ReliaBills’ payment processing features include automated recurring billing, payment tracking, payment reminders, online payment processing, and much more!
It also provides valuable tools that help manage customer information, monitor payment records, and create proper billing and collection reports. As a result, invoice and billing management are simple and convenient. You also get access to active customer support, ready to assist you whenever you need help.
Get started with ReliaBills for free today! And if you want more features, you can upgrade your account to ReliaBills PLUS for only $24.95 monthly! Subscribing to ReliaBills PLUS will give you access to advanced features such as automatic payment recovery, SMS notifications, custom invoice creation, advanced reporting, and more!
With ReliaBills, you have an all-in-one solution to your invoicing and payment processing needs. Our convenient solutions will enable you to focus more on running and growing your business. Get started today!
Wrapping Up
Understanding small business tax deductions is crucial for new business owners looking to optimize their finances. Several deductions can be leveraged to reduce your tax liability, from health insurance premiums to startup costs. However, navigating these deductions can be complex, and it’s always advisable to consult with a tax advisor to ensure compliance and maximize benefits.
With proper planning, these deductions can significantly contribute to your business’s financial health. In addition, utilizing tools such as ReliaBills can streamline your payment processes and free up valuable time, letting you focus more on growing your business. With these insights, you’ll be better positioned to navigate the financial landscape of your new business venture.
