Small Business Owners Guide to Tax Deductions for 2023

In this article:

  • The best small business tax deductions from 2022
  • Employee-related deductions
  • New tax deductions for the 2022 tax year
  • Preparing for the upcoming tax season

A tax deduction is a reduction of total taxable income based on an eligible business expense. They matter because they allow small business owners to decrease their tax liability, which can mean big tax savings.

In this guide to 2023 small business income tax returns, we look at some current tax deductions that are available to small businesses, review new tax deduction rules that may apply to your small business, and give some tips on how to prepare for the upcoming tax season in 2023.

The best small business tax deductions from 2022

Planning for the upcoming tax season should begin with making sure your business is making the most out of the current tax deductions available to small business owners and startup entrepreneurs. The following tax deductions were available for the 2021 tax year and will apply to small businesses organized as sole proprietorships, partnerships, LLCs, C-corporations, and S-corporations in the upcoming tax season.

Startup costs

Startup costs and organizational expenses for small business owners don’t technically fit into the tax deduction category, because the IRS advises taxpayers to recover these costs as capital expenditures. These costs are considered capital expenditures, rather than short-term expenses because the money spent to start the business is an investment and the expenses are converted into business assets.

This does not mean that small business owners do not receive any deductions for startup and organizational costs. The deductions are just spread out over several tax years as amortization, which allows the business to report more accurate income over the years.

Bad debts

According to IRS Topic 453, the term bad debt is defined as a “loss from the worthlessness of a debt that was created or acquired in a trade or business.” The tax deduction for business bad debts allows small business owners to recover some of their costs from unpaid invoices (accounts receivable), employee loans, business bank loan personal guarantees, or notes receivable. The challenge for most small business owners claiming a bad debt deduction is providing adequate proof that the debt was related to the business. 

Interest expenses

Small business loans and business credit cards are two vital financial resources for entrepreneurs, but many small business owners do not realize that the interest expense of business and some personal loan payments are tax-deductible. To receive the deduction, business owners must prove they are legally liable for the debt, repayment of the debt is intended, and the lender and business have a debtor-creditor relationship. In order to better understand the number of your loan payments that may be tax-deductible consider using a business loan calculator to view possible payment plans with business lenders before completing a loan application.

Small business loans are issued through traditional lenders or financial institutions, like banks and credit unions, and alternative lenders, like online lending marketplaces. The following loans are common financing options for small businesses and have deductible interest expenses. Other business lending solutions, like cash advances and invoice factoring, may also have interest payments that are deductible.

SBA Loans

SBA loans are a funding option for small businesses where the funds are partially guaranteed by the U.S. Small Business Administration. SBA loans offer lower interest rates and down payments than other types of business loans and are a great fit for borrowers that can meet the eligibility requirements, which include providing documents like two years of income tax returns and bank statements. Common SBA loan programs include SBA 7(a) loans and SBA Microloans.

Short Term loans

Term loans are usually issued by traditional banks or online lenders, like Biz2Credit. Both short-term loans and long-term loans provide the borrower with a lump sum payment upfront that is paid back with monthly payments of interest and principal as described in the repayment terms. Qualifying for a term loan is based on business credit history, personal credit score, annual revenue, and a business plan.

Business line of credit

A business line of credit is a great source of small business financing for short-term solutions to fluctuating cash flow or to increase working capital. With a line of credit, borrowers are approved for a total amount and can draw funds whenever needed. The annual percentage rate (APR) for revolving credit, like business credit cards and lines of credit, is higher than traditional bank loans but offers a fast-funding option to meet business needs. This type of financing is a good solution for borrowers that have a bad credit score or do not have an established business credit history.

Real Estate loans

Commercial real estate loans offer new business owners and established businesses long-term financing to purchase an existing building or land. Real estate loans can also be used for entrepreneurs that are considering building a new structure. The down payment and interest rate are determined based on the loan amount and creditworthiness of the borrower, but are often lower than other loan offers. Commercial real estate loans that have higher interest rates may be eligible to be refinanced at a later time if lower rates are available and there are no prepayment penalties.

Insurance

Business insurance is an unavoidable expense for small business owners but may make them eligible for a tax deduction. There following insurance costs are tax deductible:

  • Owner’s policy
  • Owner’s health insurance
  • Business continuation insurance
  • General liability
  • Malpractice insurance
  • Property insurance
  • Business interruption insurance
  • Worker’s compensation
  • Auto insurance
  • Employer-covered life insurance

Leasing costs

Rental payments made on an office space or retail space lease are tax deductible as a business expense.  The interest on lease payments made on equipment financing for copiers, machinery, and other business equipment is also tax deductible.  If the business is run from a home office, the house or apartment rent is not tax deductible as rent, but can be included in home office expense deductions.

Depreciation

Learning the right way to calculate depreciation for your small business allows the cost of furniture, equipment, and other assets to be spread over several years and can lead to significant tax savings. However, expensing the costs of fixed assets can lead to a quicker tax benefit. The IRS allows business owners to write off the full cost in one year using any of the following methods:

  • Section 179 deduction – This deduction allows up to $1,080,000 of new or used property placed in service during the tax year to be deducted. The amount that can be deducted is limited by annual revenue, but the remainder can be carried forward to future years’ tax returns
  • De minimis safe harbor election – This deduction allows business owners to expense any asset with a market value less than $2,500.
  • Bonus depreciation – This deduction allows 100% of the costs for equipment to be expensed in the first year.

Taxes

Business taxes including federal, state, real estate, and sales taxes can be deducted. Other expenses like FICA, FUTA, and state unemployment taxes, are also 100% tax-deductible.

Employee-related deductions

The costs of employee salaries and employer-paid benefits can add up quickly for a small business owner, but there is some relief available through tax savings. 

Wages and salaries

Hourly wages and annual salaries paid to employees are fully deductible, including bonuses and commissions. To deduct the cost of a salary, the individual must be formally listed as an employee of the company. For small businesses structured as sole proprietorships or partnerships, the business owners’ salaries are not deductible.

Employee benefits

Employee benefits encourage new talent, enhance the experience for current staff members, and lead to tax deductions. The following employee programs are tax deductible:

  • Education assistance
  • Childcare allowances
  • Life insurance adoption assistance
  • Qualified retirement plan accounts

Contract labor

The cost of paying independent contractors, freelancers, and even legal and professional services are fully tax deductible. The IRS requires that contract workers are issued a form MISC-1099 or 1099-K for payments more than $600 to be eligible for a tax deduction.

New tax deductions for the 2022 tax year

Changes and adjustments to the rules surrounding tax deductions are not uncommon. Some recent changes that will be reflected with the 2022 income taxes filed in 2023 include the following provisions made by the IRS.

Employee salary reductions

Beginning with the 2022 tax year, the dollar limit for employee salary reductions for contributions to health flexible spending arrangements increase to $2,850.

Medical Savings Account

In the 2022 tax year, the maximum out-of-pocket expense for employees with self-only coverage in a Medical Savings Account increases to $4,950.

Research and Development (R&D)

There are some changes to the R&D tax credits allowed beginning with the 2022 tax year. The first change is to the amendment process for R&D, requiring further documentation about each research activity performed. Another change will require businesses to capitalize all R&D expenses and amortize the costs over five years.

Preparing for the upcoming tax season

Knowing what to expect when filing a small business tax return is the first step to maximizing business tax savings, but there are other things a responsible business owner can do throughout the year to prepare for the upcoming tax returns.

Keep accurate records of income and expenses

When filing income tax returns, having access to the business records that show business earnings and expenses. To maximize tax savings, it’s a good idea to organize receipts and other expense records electronically. Many accounting software programs help business owners organize expenses.

Understand deductions

While many business owners use tax professionals, it is smart to have some basic understanding of tax deductions. Most small businesses can deduct these additional expenses:

  • Education costs
  • Inventory
  • Meals and entertainment
  • Office Supplies
  • Home office expenses
  • Vehicles
  • Advertising and marketing

Research tax forms

To correctly file your small business taxes and maximize savings, you must first determine the correct IRS tax forms to use.

  • Sole proprietors – Individuals file a personal income tax return and use a Schedule C to report business income and expenses.
  • Partnerships and LLCs – Most partners and sole owners of LLCs can also file a personal income tax with a Schedule C.
  • Corporations – Businesses structured as a corporation prepare a corporate tax return with Form 1120 or 1120S (S-Corps).

Consulting a certified public accountant (CPA) or other tax expert is a great way to make sure your small business income tax returns are filed correctly. A qualified tax professional will also help maximize the business tax deductions.

Know the deadlines

The due date for small business income tax returns varies based on how the business is structured. The deadline for partnerships and S-Corporations is usually the first business day on or after March 15th. Most other taxpayers are required to file their returns by April 15th. https://www.biz2credit.com/blog/2019/04/03/what-a-small-business-should-expect-when-filing-their-first-tax-return/Again, the best way to ensure you are meeting the correct deadlines is to consult a tax professional or check the IRS website for guidance.

Bottom Line

Filing business income tax returns can be an overwhelming experience for new business owners, but it’s a process that gets easier with knowledge and proper planning. Tax deductions, like those for interest expenses, employee costs, and research and development, can lead to big tax savings. Taking some time to get familiar with the latest rules and regulations regarding tax deductible expenses is the first step in reducing your income tax liability.

Many entrepreneurs and motivated individuals shy away from new business opportunities because of a lack of funding or a fear of not qualifying for financial assistance. However, funding tax payments or new business ventures can be as easy as a quick online application with Biz2Credit. For Victor Alacazar, fast funding was made possible with a $20,000 cash advance through Biz2Credit.

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