Many people dream of starting a business because it gives them flexibility, autonomy, and ownership. After all, starting a business and scaling it to great heights is the American dream. However, running a business isn’t easy, especially considering that most businesses must undergo a rocky period during their initial phases before reaching profitability.
Moreover, most business owners must usually start small and scale over time. As a result, you’ll have to focus on your business’s day-to-day operations. Things become even more complicated when you add taxes to the mix. Then, of course, there are external factors to take into account, such as an economic recession, a natural disaster, or even a pandemic! Hence, the area where you can save up is, ironically, taxes.
If you have no previous business experience, you’ll be surprised and overwhelmed to learn that taxes for businesses significantly differ from taxes for employees. You’ll want to learn more about how corporate taxation works.
Fortunately, many tax breaks and deductions exist for small businesses. Knowing how to utilize them can help you reduce your tax liability and keep more money for your business, allowing you to grow quickly. However, you’ll need to develop an appropriate tax-reduction strategy, which requires sufficient knowledge of how you can avail of a reduction in taxes.
For instance, you might not know what is capital loss tax deductions. Alternatively, you might be thinking about which deductibles are claimable. This article will provide you with answers.
Tax Deductions Small Businesses Must Know About in 2023
Here are some tax deductions small businesses must know about in 2023:
- Business Meals
Businesses often entertain prospective and existing clients with business lunches or dinners. The good news is that these business meals are deductible. As a small business owner, you can get a 50 percent tax deduction on meals and beverages. However, you’ll need to keep the receipts. In addition, you must prove the meal expenses were business-related.
You’ll also need to document the meal’s date and location, your business relationship with fellow diners, and the total cost.
- Work-Related Travel Expenditure
As a small business owner, you might often need to travel. For instance, your business might be based in New Jersey, but you might be trying to land a big client in New York City. As a result, you’ll need to travel and meet with the client before onboarding them. Such instances are common in the business world. Small business owners must often spend considerable sums on airfare, car rentals, hotel bookings, etc.
Fortunately, you can claim tax deductions on these expenses if you show they meet the conditions to qualify as business-related travel expenses. Doing so requires highlighting why the trip was necessary for your business. In addition, the trip must also take you away from your tax home, meaning you must travel out of the city. Finally, you must travel away from your tax home for longer than an average workday, and the trip must necessitate sleeping or resting.
For further clarification, refer to the IRS website to learn more about deductible business travel expenses.
- Start-up Expenses
If you’ve only recently started your business and it’s the first year of operations, you can also claim up to $5,000 in start-up costs. This deductible covers legal expenses, employee onboarding and training, and market research. However, it’s important to note you can only claim start-up expenses if your total costs are below $50,000. You can’t claim these deductions if your start-up expenses are $55,000 or more.
- Home Office Expenses
If you’re running a small business out of your home, you might also be eligible for home office deductions under the IRS’s new guidelines. These guidelines state that for every square foot of your home used for business purposes, you can deduct five dollars. You can claim deductions on up to 300 square feet. However, you’ll need to ensure the area is exclusively used for business purposes to qualify. Moreover, you’ll have to use this home office regularly as the principal place for your business.
- Office Supplies
Whether you’re a small business or a large conglomerate, you still need office supplies and stationery. Items such as printers, pens, paper, computers, etc., are expensive but necessary for business operations. The good news is you can claim a deduction on these expenses. Ensure you keep receipts for all office purchases.
- Internet and Phone Expenses
Modern businesses cannot operate without a reliable internet connection. In addition, you’ll rack up considerable phone expenses because you’ll need to communicate with clients. Fortunately, you can claim deductions on these expenses. However, remember that if you use the same phone and internet service for personal purposes, you can only write off the percentage cost used for business purposes.
- Health Insurance Premiums
Small business owners can also claim tax deductions on health insurance premiums for employees. However, you must pay over 50 percent of your employees’ premiums to qualify for these deductions.
- 1099 Tax Deductions
1099 tax deductions can be particularly beneficial for small business owners and self-employed individuals. These write-offs let you reduce your tax liability.
They’re also particularly useful if your small business hires a contractor or freelancer because 1099 tax deductions enable you to deduct the entire cost.
For instance, let’s assume you hire a freelancer to design your website and do social media marketing for it. The entire cost is $3,500. You’ll be delighted to learn this whole cost is deductible.
- Business Marketing Costs
You can create a great product. However, customers won’t know how to find it if you don’t market your business and its offerings. Today’s fiercely competitive business market requires advertising and marketing. It’s why large enterprises have multi-million dollar marketing budgets.
As a small business owner, you’ll also be marketing your business on social media and other digital marketing avenues. You’ll be happy to learn business marketing and advertising costs for small organizations are completely tax-deductible.
In addition, these deductions are claimable on both digital and traditional marketing channels. For instance, you can claim deductions if you sponsored an event or conference. Similarly, you can also claim deductions on newspaper and TV ads.
Managing your business’s expenses is challenging, especially when you’re already focused on its day-to-day operations as a small business owner. In addition, starting a new business and scaling it can be extremely capital-intensive. Taxes are another concern for small business owners. Fortunately, tax deductions on business expenses can simplify things for you and help you save a considerable portion of your budget, which you can use to grow your business. Ensure you claim the deductibles listed in this article.