Updated for tax year 2023.
Being a small business owner comes with some unique challenges — including figuring out how small business taxes work.
The good news? We’re here to spill the essential small business tax deduction secrets to help you keep that hard-earned money in your pocket.
As a small business owner of a sole proprietorship, partnership, or LLC, you may be able to deduct many business-related expenses that you would not be able to deduct if you were just an employee. These deductions don’t stop at simply reducing your taxable income either. When you take small business deductions for taxes, you also reduce your income which is subject to self-employment tax.
Reducing your adjusted gross income (AGI) may help lower your small business taxes in other ways, too. For example, a lower adjusted gross income may mean you qualify for education credits or other small business tax perks.
Check out some of the best small business tax write-offs for the tax year 2023 below.
1. Self-employed health insurance deduction
If you have income from self-employment and buy your own health insurance, you may qualify to deduct your health insurance premiums as an adjustment from income.
To qualify for the self-employed health insurance deduction, you must be ineligible for health insurance benefits through an employer — your own or your spouse’s. The coverage can be for you, your spouse, and your dependents.
This tax deduction cannot be more than your business net income.
2. Business startup costs
If you’re just starting out, the IRS offers some valuable tax breaks for new small business owners.
As long as your startup costs total $50k or less, you can claim the business startup deduction which allows you to deduct up to $5,000 of business startup costs and $5,000 of organizational costs. If your startup costs exceeded $50k, you can still choose to amortize your startup costs over 15 years, meaning you deduct a fixed amount of the expenses each year.
If you took out a business loan, you may deduct any loan fees or professional fees you had to pay to secure the loan. And if you paid to have some shiny new business cards made, you can deduct the cost for those as well.
3. Deducting internet and other service fees
The monthly fees you pay for internet service can really add up. Just keeping your computer running can sometimes come at a cost if you experience any problems with your hardware. You may also be paying subscriptions for virus and malware control, professional references, and subscription software to keep your business activities running smoothly.
Thankfully, internet and related service costs are all deductible for small businesses! When filing your taxes this year, take the time to look for all internet, subscription, and other service fees you pay that may entitle you to a deduction in the 2023 tax season.
4. Phone service tax deductions
If you have separate phones for business and personal use, regardless of whether they are landlines or cell phones, you can take full deductions for the lines you use for your business.
Unfortunately, if you only have one landline phone for both business and personal use, the Internal Revenue Service does not allow you to deduct its cost. However, you can still deduct any long-distance charges related to your business.
If you have a second line or cell phone that you use for both business and personal calls, you can deduct a percentage of the cost of your phone service. For example, if you use your cell phone for business purposes 75% of the time and personal calls for the other 25%, you can claim a deduction for 75% of your phone bill.
Pro tip: You may want to request an itemized phone bill to help prove the business usage of your phone.
5. First-year depreciation of business assets (Bonus Depreciation and Section 179 Expense)
If you haven’t already, add bonus depreciation to your small business tax deductions checklist. This is one of the best small business tax deductions offered by the IRS.
In short, bonus depreciation is a way to accelerate the depreciation of qualified items you might buy for your business. The first-year deduction allows you to deduct the full purchase price of your business assets upfront rather than claiming a bunch of smaller deductions over several years.
For tax year 2022, bonus depreciation was set to 100%, which allowed you to claim 100% of the qualified asset cost as a deduction in the year that you place it in service. However, for tax year 2023, bonus depreciation is set at 80%, and it will continue gradually phasing out through 2026, dropping by 20% each year until phasing out completely in 2027 unless new legislation is introduced.
Bonus depreciation is available on both new and used assets, as long as the asset is new to the taxpayer. Bonus depreciation allows small business owners to create a tax loss, so you can claim this small business tax deduction even if it exceeds your business income. However, it’s an all-or-nothing situation — if you take bonus depreciation on an eligible asset, you cannot also depreciate the asset over its remaining tax life. So, you may need to decide if you want to take the entire deduction upfront or take normal depreciation to spread out the deduction.
Another special provision in the tax code is the Section 179 expense deduction. This deduction is similar to bonus depreciation, but it allows you to immediately expense 100% of the asset’s cost. However, there are some amount restrictions that come with it. For 2023, the maximum deduction amount is $1,160,000. Unlike business depreciation, the Section 179 deduction cannot create a tax loss, so the amount you can claim is limited to the amount of income you made that tax year.
Bonus depreciation can be more favorable than the Section 179 deduction. However, the one advantage of the Section 179 deduction is that you can select the amount you wish to expense under Section 179. This is favorable over bonus depreciation because bonus depreciation is an all-or-nothing election. Any asset cost that you do not elect for Section 179 can be depreciated over its remaining tax life.
6. Continued depreciation deduction on business assets
If you purchased business equipment and other business assets in previous years but did not fully expense them in the year you purchased them, don’t forget to claim the tax deduction for this year’s depreciation for each asset.
7. Deduct professional dues and subscriptions
Professional dues and subscriptions add up, and they’re easy to miss as a deduction if you pay them automatically every year. For example, you can deduct the cost of trade journals, magazine subscriptions related to your work, and dues to maintain your professional license.
Unfortunately, you can’t deduct dues to clubs the IRS considers to have more of a social or recreational aspect, such as dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs.
8. Cost of goods sold
If you sell products you make or buy in your business, the cost of those products can be a major portion of your total business expenses. That’s why it’s important to calculate the deductible amount of your cost of goods sold each year.
One caveat is you can’t generally deduct the cost of the inventory until you sell it. Instead, you report your beginning inventory, purchases, other expenses that are added to the cost of goods sold, and ending inventory. From this information, TaxAct calculates your deductible cost of goods sold on your business return.
Materials and supplies you use to make products, whether or not they become part of the products, should be included in the cost of goods sold. An expense should be included in inventory if it is used in the manufacture or mining of the goods you sell. For example, manufacturing labor is included in the cost of goods sold. Selling and administrative labor costs are not.
9. Bad debts
If someone owes you a debt that comes from operating your business, you may be able to write off that debt on your business return.
If you use the accrual method in your business, you may have bad debts when customers buy things on account and then don’t pay you. However, if you use the cash method (as many small businesses do) you cannot generally take a bad debt deduction for uncollectible customer accounts. That’s because you did not count the customer’s purchase as income when they made the purchase.
If you make loans in the course of your business to suppliers, clients, employees, and so on, you can take a business deduction for the bad debts when these loans become uncollectible.
10. Vehicle expense write-offs
If you use your vehicle for business travel, your vehicle expenses can provide a valuable tax deduction. Every time you go to the store to make a business purchase, meet with a client, or drive for other company business, make sure you track your business miles to ensure you get the tax deductions you deserve.
How much can you write off for a business vehicle? You can usually choose one of two ways to calculate your vehicle expenses: You can take the standard mileage rate, which is 65.5 cents per mile for 2023, or you can deduct your actual expenses for driving your vehicle for business use.
The IRS requires you to track your business, commuting, and personal miles (and the business purpose of your miles) regardless of which method you choose. If you want to deduct actual expenses, you must also track expenses for gas, oil, service, interest on a vehicle loan, lease payments, insurance, and depreciation.
You must track actual travel expenses in some cases, such as if you did not use the standard mileage rate the first year you used your vehicle in business, if you claimed a Section 179 deduction or special depreciation allowance on the vehicle purchase, or if you operate five or more cars at the same time. Good bookkeeping is essential to maximize this deduction.
If you run your business from your home, you can start tracking business mileage when you leave your driveway on company business. If you have another main place of business, such as a retail store, you can only count business mileage from your main business location. Your trips from home to the store are considered commuting expenses, which are not deductible.
11. Employee benefits
Benefits you pay under qualified benefit programs to your employees are a deductible expense. For example, you can deduct your cost of qualified accident and health plans, adoption assistance, cafeteria plans, dependent care assistance, educational assistance, and group-term life insurance coverage for your employees.
Ah, the ultimate small business milestone — deducting taxes on your tax return! Don’t worry, it’s not as confusing as it sounds.
Many taxes you pay in the course of your business are deductible as business expenses. Some taxes are already included in the business expenses you pay. For example, you pay a fuel tax for the gas you use to drive your vehicle for business, and the tax is included in the price of gas. Likewise, when you pay sales tax on office supplies or a delivery truck, the sales tax is included in your office expense or the cost of the truck.
But you may pay other taxes separately and can deduct them as taxes on your business return. These kinds of deductions include state tax on gross business income, federal and state payroll taxes, personal property tax on business assets, real estate taxes on business property, and excise tax you pay to the state.
Unfortunately, you cannot deduct federal income tax.
13. Home office deduction
If you have an area in your home that you use as an office or for any other business purpose you may be able to take a deduction for your home office, but — you guessed it — there’s a catch.
To claim the home office deduction, you’ll have to meet certain rules: The space you claim as your home office must be solely devoted to your business and nothing else, in most cases. There are two special cases in which you don’t have to meet the exclusive use rule: If you use your home to store inventory or product samples, or if you run a daycare facility.
Your office doesn’t have to fill a whole room either. Let’s say you use half your den as a home office. You can deduct expenses based on the square footage that you use exclusively for business (more on that shortly).
When you claim a home office, you deduct indirect and direct expenses:
are those that apply only to your home office, such as painting or repairing just your office. You claim 100% of direct expenses.
include a percentage of the amount you pay for electricity, rent, and so on for your whole house. To find the percentage, divide the total square footage of your home by the number of square feet in your home office.
If finding all those utility bills and other receipts sounds like more trouble than it’s worth (we get it), the IRS has another option you may prefer — instead of calculating everything yourself, you can use a simplified home office deduction where you take a flat $5 per square foot deduction for your home office, up to a maximum of 300 square feet.
14. Retirement contributions
One benefit of having a small business is the freedom to choose a better retirement plan for your needs. This is especially true if you want a full range of investment options and the ability to invest more per year than with traditional IRAs or most employee retirement plans.
It pays to compare plans. If you choose a deductible retirement plan, you may be able to lower this year’s taxes by contributing up to $6,500 to a traditional IRA in 2023 ($7,500 if you’re age 50 or older). But if you use a SEP IRA as a self-employed person or small business owner, for example, your business can contribute up to 25% of your compensation, up to a maximum total contribution of $66,000 for 2023.
15. Contract labor costs
Did you hire any independent contractors or freelancers to do work for your business last year? If so, any wages paid for contract labor costs can also be deducted from your taxable business income.
16. One-half of self-employment tax
If you’re self-employed, you pay the full Social Security and Medicare tax on your self-employment income. There’s no employer to share in the cost. To help compensate for this, the IRS allows you to deduct one-half of your self-employment tax as an adjustment to income on your tax return.
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This article is for informational purposes only and not legal or financial advice.
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