As a small business owner, you’re probably used to meticulously tracking expenses and income, ensuring your balance sheet always balances. However, whether you do your own taxes or enlist the help of an outside firm, you may not be aware of several tax breaks for small businesses. Missing out on these effectively costs you money. There is still time to take advantage of these tax breaks for your 2023 taxes, so let’s discuss some easily-overlooked items.
A tax break is a benefit the Internal Revenue Service (IRS) provides that results in a lower tax bill. These benefits fall into four main categories:
- Deductions lower the amount of income on which you pay taxes.
- Credits directly reduce the amount of taxes you owe.
- Exemptions also reduce your taxable income amount.
- Exclusions are certain types of income, such as retirement or federal subsidies, that don’t count as taxable.
This article examines 11 tax breaks for small businesses to help you keep your hard-earned money. (Remember that Viking Mergers & Acquisitions cannot offer tax advice, but we can connect you with a tax adviser if you need assistance filing your 2023 taxes.)
11 Tax Breaks for Small Businesses:
1. Home Office Deduction: Maximizing Your Workspace Savings
If you run your business from home, you can claim office-related expenses on your taxes. To qualify, you must use the designated space exclusively and regularly for business purposes, such as conducting sales or meeting with clients virtually or in person. Eligible expenses may include a portion of mortgage or rent, utilities, insurance, and maintenance costs.
You have a couple of choices if you plan to claim this deduction. The simplified option is a standard deduction of $5 per square foot of your office’s area, up to a maximum of $1,500. In these cases, you don’t need to itemize expenses. Alternatively, the regular method calculates your deduction based on the proportion of your home’s total area taken up by your home office.
For example, if you have a 2,000-square-foot home with a 200-square-foot office, your deduction would be 10% of eligible home expenses since your office is 10% of your home’s square footage.
2. Vehicle Expenses: Deducting Business-Related Transportation
Similar to home office deductions, there are two options for claiming vehicle costs on your taxes: the standard mileage rate and the actual expenses method. With either option, you can only claim the mileage used for business. The standard mileage rate allows businesses to deduct a set amount per mile driven, but there are several stipulations to determine whether vehicles qualify.
The actual expenses method entails deducting specific costs, such as fuel, maintenance, insurance, and depreciation, based on the percentage of total vehicle use dedicated to business purposes. You can claim 100% of the associated costs if the automobile is used exclusively for business.
For tax year 2023, the vehicle deduction is 65.5 cents per mile, but the IRS recently increased it to 67 cents going forward.
3. Depreciation Deductions: Capital Assets and Equipment
Capital assets for your business may include machinery, buildings, and vehicles. Unfortunately, these items lose value over time, but you can offset this depreciation with tax deductions. Businesses can deduct the cost of each asset progressively over its useful life, accounting for the wear and tear or technological advancements that may reduce its value over time.
Methods for calculating depreciation include straight-line depreciation, which spreads the cost evenly over the asset’s useful life and accelerated depreciation, which frontloads more significant deductions in the earlier years. The appropriate depreciation method for these assets depends on factors like their expected lifespan and potential for future value. For instance, the straight-line method would be best for a computer or other short-term asset. The accelerated depreciation method is better suited to an office building, which has a longer lifespan and may gain value.
4. Retirement Plan Contributions: A Dual Benefit
Retirement plan contributions present a dual benefit for business owners in that they reflect a tangible investment in employees’ well-being and are also financially advantageous for the business. You can contribute to retirement plans such as Simplified Employee Pension (SEP) IRAs or Solo 401(k)s, either of which reduces your taxable income. Contributing to retirement plans is particularly valuable for entrepreneurs who may not have access to traditional pension plans but want to be proactive in securing their financial future.
If your company has just launched a 401(k) or hasn’t maintained any retirement plan for the preceding three years, you may qualify for a tax credit equaling a percentage of the new plan’s startup costs. This tax break maxes out at $5,000 annually and is limited to the first three years you sponsor the plan. Check with your CPA or financial advisor for any establishment dates that may impact this strategy.
5. Health Insurance Premiums: Deductions for Self-Employed
The IRS allows eligible self-employed individuals to deduct the cost of health insurance premiums for themselves, their spouses, and their dependents from their adjusted gross income. To qualify, you must not be eligible for employer-sponsored health coverage through your or your spouse’s job. The IRS also stipulates that you can’t file as “Married Filing Separately” or make an income above 400% of the federal poverty line, which changes by year.
This deduction is an “above-the-line” deduction, meaning it reduces your gross income. You can also receive this credit whether or not you itemize deductions. For example, suppose you pay $500 per month for a health insurance policy covering yourself and your family. In that case, you may be able to deduct the entire annual premium of $6,000 from your taxable income.
6. Education and Training Expenses: Investing in Skills
For small business owners, investing in education and training expenses is an employee benefit that also pays off for the organization. You can deduct 100% of qualified education expenses, such as:
- College courses
- Seminars
- Workshops
- Books and other publications
However, the expenses must add value to the business and improve your employees’ job-relevant skills to qualify. This strategy not only enhances the capabilities of individual employees but also positions your company to adapt to industry changes, improve productivity, and remain competitive.
7. Interest on Business Loans: Capitalizing on Borrowing
Deducting interest paid on business loans is another way for small and medium-sized businesses to reduce taxable income and keep more of their hard-earned revenue. To be eligible, you have to be legally liable for the debt, it must be an actual business lender (i.e., not family or a friend), and you have to spend the money on a legitimate business need. This deduction can alleviate the financial burden associated with borrowing, making it more cost-effective for SMBs to access necessary funds for expansion, working capital, or other business needs.
Remember that this deduction is just for the interest on the loan, not the payments themselves. For example, if your loan payments total $10,000, of which interest is 5%, you can only deduct $500 from your taxes. Eligible loans for this credit include:
- Small Business Administration loans
- Short-term loans
- Term loans
- Personal loans
- Business lines of credit
8. Startup Costs: Capitalizing Early-Stage Expenses
Launching a business comes with substantial upfront costs, but understanding how to capitalize on tax breaks for small businesses can significantly ease the financial burden associated with the new venture. Entrepreneurs may deduct a portion of their startup expenses, such as those for market research, legal fees for business formation, advertising, and employee training. The deduction is typically available for up to $5,000 in the first year, with the remaining costs amortized over a 15-year period.
By alleviating the immediate tax burden associated with early-stage expenditures, this tax break encourages entrepreneurs to take calculated risks, pursue growth opportunities, and contribute to economic development. SMBs can strategically plan their expenses, using the available tax breaks to enhance their financial viability and resilience in the challenging initial phases of business development.
9. Bad Debt Deduction: Managing Unrecoverable Receivables
When SMBs are unable to collect payments owed to them, they may qualify for a bad debt deduction, allowing them to write off the uncollectible amount as a business expense. This amount reduces your gross income. To claim this deduction, you’ll need to prove the debt is genuinely uncollectible and that you made reasonable efforts to recover it. The IRS provides these examples of bad debts:
- Loans to clients, suppliers, distributors, and employees
- Credit sales to customers
- Business loan guarantees
This tax break helps small businesses manage cash flow effectively and address the inherent risks in providing goods or services on credit. The bad debt deduction acknowledges that not all accounts receivable will be collected and allows businesses to align their taxable income with the economic reality of their balance sheets.
10. Obsolete Inventory: Minimizing Losses
Many businesses, particularly in the manufacturing, distribution, and retail industries, carry extensive amounts of inventory. When inventory reaches the end of its product life cycle, meaning it has not yet been sold and is no longer expected to be sold at its market price, it becomes obsolete. Obsolete inventory can be a costly problem for businesses, as it ties up valuable storage space and capital.
Businesses can often claim a tax deduction for their obsolete inventory. By proving obsolescence through proper documentation, businesses can often write off the value of these items as a loss on their tax returns. Specific rules and guidelines need to be followed, but businesses can take a tax deduction for the obsolete inventory by liquidating it, donating it, or destroying it.
11. Energy Efficiency Incentives: Going Green to Save Green
The government provides tax breaks and incentives to encourage companies to adopt energy-efficient practices and technologies, making the world more sustainable while saving business owners money. SMBs investing in energy-efficient equipment, such as lighting systems, HVAC upgrades, or renewable energy systems, may qualify for these tax benefits. Besides reducing the upfront costs of implementing energy-efficient measures, these incentives provide ongoing savings by reducing energy consumption.
Additionally, energy-efficient improvements can enhance your business’s overall value and marketability by appealing to environmentally conscious consumers and potentially opening doors to new markets. For SMBs, combining environmental responsibility and the financial benefits of tax incentives makes adopting energy-efficient measures a prudent and strategic business decision.
Uncovering Hidden Savings for Your Business
As tax season swiftly approaches, we hope this list of tax breaks for small businesses shines a light on some areas where your company can save money. Although Viking M&A can’t provide tax advice, we can put you in touch with someone who can. From deducting expenses for your office or automobile to offsetting bad debts or business loan interest, the IRS offers several tax breaks to keep your hard-earned money where it belongs—with you.
Now is also a wise time to evaluate the state of your business with a professional business valuation. At Viking, we’ve developed a proprietary approach to business valuation; in addition, we take time to explain how we determined your company’s valuation, address your questions or concerns, and provide actionable insight into ways to enhance your business’s value. Contact Viking today to get started with a complimentary, confidential valuation.
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