Every year, the tax law changes. As business owners, it is important to stay up to date with the most current rules and regulations regarding your industry. One of the biggest things that business owners rely on is tax deductions. These deductions are able to lower your taxable income and therefore, reduce your tax liability. Some deductions have been the same for ages, and some have changed recently. We will discuss the most common tax deductions for business owners and the corresponding rules for the 2023 tax year.
Many small business owners are able to qualify for the Qualified Business Income (QBI) deduction. This allows eligible taxpayers to deduct up to 20% of their QBI, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. This generally includes the deductible part of self-employment tax, self-employed health insurance, and deductions or contributions to qualified retirement plans. A qualified trade of business is any Section 162 trade or business, with three exceptions:
1. A trade or business conducted by a C corporation.
2. For taxpayers with taxable income that exceeds the threshold amount, specified services trades, or business (SSTBs).
An SSTB is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, financial services, investing, and investment management, trading, dealing in certain assets, or any trade or business principal asset is the reputation or skill of one or more of its employees or owners.
a. For 2023, the threshold amount is $364,200 for a married couple filing a joint return, and $182,100 for all other taxpayers. The SSTB limitations don't apply to taxpayers with taxable income at or below the threshold amount. Limitations are phased in for joint filers with taxable income between $364,200 and $464,200, and all other taxpayers with taxable income between $182,100 and $232,100. For later years, the threshold amounts, and phase-in range will be adjusted for inflation.
3. Performing services as an employee.
Business meals are something that every business owner has run into. Whether itis taking a client out to eat or hosting a holiday party for the office. These business meals for employees and clients can be tax deductible. There was a temporary 100% deduction for business meals in 2021 and 2022. For 2023, the meal deduction is moved back to 50% for most situations. Some examples of meals and their deductions are:
• Business meals with clients (50%)• Office snacks and other food items (50%)
• The cost of meals while traveling for work (50%)
• Lunch out with less than half of company employees (50%)
• Food for company holiday parties (100%)
• Food and beverages given out free to the public (100%)
• Dinner for employees working late at the office (100%)
With a massive growth in working remotely, the home office deduction is being utilized now more than ever. Self-Employed workers, contractors, freelancers, and telecommuters sometimes require a home office to conduct business duties. Business owners who use a home office for business may be able to deduct expenses tied to the creation and maintenance of the workplace. To qualify, the taxpayer must utilize part of the home “regularly and exclusively” for business. You can calculate the deduction in two different ways, actual expenses or the simplified method. You may also deduct expenses that are indirect or direct. Indirect expenses must be deducted based upon the portion of the home being used as a home office. Some examples of these include utility bills, general repairs, and homeowner’s insurance. Examples of direct expenses may include designated phone lines, paint, and long-distance calls.
For a vehicle that is used strictly for business purposes, any costs associated with that vehicle are tax-deductible under certain circumstances. You can deduct 100% of the costs of a business vehicle that is a car, SUV, pickup truck, or van. It is important to keep records and if the vehicle happens to be for both business and personal use, the costs must be split based upon actual mileage. Some examples of deductions can include insurance, maintenance/repair costs, registration fees, and toll/parking fees.
Finally, let’s take a look at advertising and marketing costs. In the eyes of the federal government, small business advertising and marketing efforts qualify as fully taxdeductible. This is only applicable if the actual expenses are considered ordinary, reasonable, and necessary. 100% of eligible costs are deductible. Some examples include influencer marketing, tv, and newspaper advertising costs, and the cost of producing advertising materials such as business cards, flyers, etc.
Business owners need to take advantage of every deduction that they can. While tax laws are changing constantly, it is important to stay ahead of them. For any questions regarding your small business tax deductions or anything tax related, please do not hesitate to reach out to the professionals at The Center for Financial, Legal, and Tax Planning, Inc at our website, www.taxplanning.com or by phone at (618) 997-3436.