Top 5 Tax Deductions for 2023
The main factor in determining certain tax strategies is the structure of your business. Are you an S - Corporation, C - Corporation, Partnership, or Sole Proprietorship? S - Corps, Partnerships, and Sole Proprietorships are generally passthrough entities where taxes are passed to the owners, versus the C Corporation where the owners are double taxed based on dividends received.
Once your business structure is decided upon, here are the top 5 ways you can get the most out of your tax return:
1. Qualified Business Income Deduction
If you’re anything but a C Corporation, this deduction, product of the TCJA, is by far one of the most impactful deductions. The calculation can be somewhat arduous due to the data points required. The business must define the income or loss from each trade or business and determine what type of trade or business it is. This will affect how much the deduction can be. The business must also know how much W-2 wages were paid by the qualified business and the unadjusted basis after acquisition of qualified property held by the business.
Businesses who get the most benefit out of this deduction are ones that are active, but passive investors with flow-through entities can benefit some as well. The maximum income for those looking to take advantage of this deduction is $170,050 for single individuals and $340,100 for married individuals.
2. Section 179 Expensing
America’s favorite tax deduction. This deduction allows businesses to expense the entire cost of an asset purchase in the year of acquisition. Normally, you would have to wait and allow depreciation to be incurred for there to be any tax benefit from the asset. A caveat of this deduction, however, is expenses resulting from Section 179 must not put the business in a loss. This means if you had $25k in taxable income and you purchased a $30k truck, you would only be able to take up to the $25k mark so your net income is 0 barring any other Section 179 rules. Some eligible property for Section 179 is:
- New and used machinery, equipment, vehicles, and other personal property.
- Computer Software purchases
- Qualified property improvements
- HVAC systems, roofs, and alarm systems
There is also an additional tax benefit related to Section 179 which is Bonus Depreciation. Bonus depreciation is available for assets with a useful life of 20 years or fewer according to the IRS’s property listings. This would include farm buildings, qualified property improvements, vessels, boats, machinery, trucks, and tractors.
3. De Minimis Items
Do you have any purchases that blur the line between asset and supplies? If they are under $2,500, just expense them entirely. These items qualify as de Minimis Items, and you are able to write them off immediately.
4. Know Your Tax Credits
There are several tax credits businesses are completely unaware they qualify for.
5. Retirement Plans
For small business owners, generally the business is the retirement plan. You sell out when you’ve had enough, and you’re officially retired. In the mean time, you can reduce your taxes and keep the money. With self-employed pensions & SIMPLE IRA’s, business owners can expense a portion of their retirement contributions to the business.