In this article, I’m going to tell you what business expenses are tax deductible for 2023. Pretty simple. You’ll find a readable overview supported by specifics, facts, and practical examples.
But if you skim the first few headlines, you’ll notice that each heading states a business value, not the name of the deduction. It’s a minor alteration with a whole lot of meaning behind it.
Here’s the point: Deductions are incentives from the government, and their effect is to lower the cost of doing business and make business activities that contribute to the public good profitable: benefits for employees, rapid innovation, and fewer barriers to success. In short, prosperity.
So let’s think past the typical adversarial relationship between business and government. The federal government created deductions to help your business; all we need to do is take advantage of them.
Retain high-performing employees
Payroll expenses are tax deductible, as well as employee wages. Think of it like this: your business can deduct everything you pay your employees, including the portion that goes toward employee payroll taxes.
Extend gifts and bonuses with confidence
Savings include bonuses, loans, reimbursements (for supplies and other expenses), and continuing education. So good work and habits of high-performing employees are rewarded—without increasing your tax burden.
Sick leave and vacation pay are deductible, which could convince shareholders in your organization to consider more accommodating and attractive policies for salaried vacation and sick days, perhaps leaving room for better family leave.
Scale and save with tax restructuring
If your business is expanding, and you’ve delegated responsibilities for operations appropriately, the additional corporate governance associated with a switch to an S-Corp can provide lucrative deductions for shareholders.
For example, you, a shareholder, can pay yourself a reasonable salary and deduct that salary from your business income, treating the rest as profit.
It makes sense. You’re working in the business daily, so you receive a salary commensurate with your labor.
Since an S-Corp is a pass-through entity, FICA taxes will be taken from your reasonable salary, not your share of business profits. It amounts to significant savings and rewards growth. That’s a strong incentive.
Transform accreditation and continuing education into tax-neutral opportunities for learning
Businesses or practices that provide professional services, such as accountants, attorneys, and doctors, often require annual accreditation and continuing education. Fortunately, these expenses are tax deductible.
Are you working with an accountant? Then you can write off those expenses as a tax deduction. Or are you required by law to carry a specific type of insurance? Those premiums are also tax deductible.
Most professional training can also be written off as a business expense for service-related businesses. In many states, occupations like social work, accounting, insurance sales, and financial advising require routine, standard continuing education units. These courses and seminars can cost money but can also be subtracted from your profits as a legitimate operating expense.
Not all continuing education courses are tax-deductible expenses
Accreditation coursework and professional education outside the scope of your business are not tax deductible.
For example, taking a refresher course on labor and safety standards checks out if you’re running a construction company. But if you want to learn how to sell real estate, that course will not be tax deductible. It’s related to your business but not a core competency.
Maximize Home Office Deductions for Work Flexibility
When we talk about what business expenses are tax deductible for 2023, the expansion in remote work cannot be ignored. Business owners who work from home can and should offset expenses with home office deductions, so long as the expenses are business-related.
There are a few different ways to calculate home office deductions. But first, ask yourself, “How much business do I conduct in this room?” You may work in the living room, but is it a home office? Think about it.
Standard Deduction Method
The standard deduction for self-employed taxpayers is $5 per square foot for up to 300 square feet annually, which is not particularly impressive. Fortunately, there are more sensible and accommodating calculation methods available.
Area Method: Calculated by Square Footage
Using the area method makes a lot more sense. Your office needs heating and cooling, and to maintain the office, you may be paying rent or a mortgage. Here’s how to get started with the area method:
- Get the total square footage of your home, as well as the square footage of your home office;
- Calculate what percentage of your home is a dedicated workspace; and
- Multiply that number by the following expenses: mortgage or rent, interest, insurance, utilities, and repairs.
It’s a step up from the simplified method, and the IRS updated the information on this method in January of 2022.
Number of Rooms Method: Calculated by Ratio
This method is best suited for business owners who use multiple rooms for business purposes. The calculation method is straight from middle school math. It’s a fraction (the same as a ratio).
- Count the number of rooms designated for business;
- Count the total number of rooms in your home;
- Divide the number of business-designated rooms by the total number of rooms in your home; and
- Multiply that number by the following expenses: mortgage or rent, interest, insurance, utilities, and repairs.
There’s some math here, so call our office at (682) 224-3243 for help if you run into issues.
Choose risk and reward over safety and stagnation
Fear is the enemy of growth. Businesses must be agile and adaptive to change, so as the business owner, you must set the level of risk in proportion to future reward.
Is this a binary decision? Win or lose? No. And that’s because business losses from at-risk activities are tax-deductible.
Let’s use an example: Your business is launching a new product using a multi-channel campaign. Engagement is high. Excitement is high. The product’s generating buzz. Now, you come to the point of decision-making with two options.
Option #1: Purchase more inventory than anticipated to fulfill higher-than-anticipated order volume.
- Risk: If your projections and estimates are incorrect, you’re stuck with a glut of inventory that won’t sell.
Option #2: Keep standard inventory volume to eschew the risk of surplus inventory.
- Risk: If projections and estimates are correct, you will not have the inventory to fulfill high-order volume. Excitement recedes because you cannot deliver products to excited consumers.
How business loss deductions incentive risk and innovation
Now, we see the risk in both options. But only one option (and expenses associated with that option) has a safety net (the tax deduction for business losses). Look away for a moment and take a guess. Which option comes with tax deductions?
If you guessed option #1, you are correct. You purchased inventory that didn’t sell. It was an at-risk activity, which qualifies as a business loss and a tax deduction.
In some cases, businesses may carry up to 80% of business losses forward into the future tax years. However, if you’ve elected to structure your business as a C-corporation, that option is not available.
Sometimes breaking even is enough
There are some exceptions: Passive Activity rules mean that losses from assets like rental properties can only be deducted up to the amount of business income—less lucrative but still acceptable. So, in a limited sense, you break even (if you don’t count labor and company resources).
Different rules and requirements apply if your losses come from investment activities. If you need guidance on what business expenses are tax deductible for 2023 regarding other types of losses or specific assets, we recommend that you speak with a tax professional.
Take advantage of work-related travel deductions
As many as 55% of business owners travel at least once a month for a diverse range of business-related activities. The expenses associated with travel are tax deductible. We’ll split the deductions into two categories: long distance and local travel.
Long Distance Travel
Some examples of long distance travel include out-of-state conventions, meetings with professional organizations, and in-person training or continuing education.
For travel expenses to qualify as a tax deduction, the following requirements must be met: Travel should be planned ahead of time for business purposes only, and the majority of days should be reserved for business-related activities, exempting actual travel time.
There are no daily reporting requirements for business activities, so take advantage of any additional time to examine high-level strategies and refresh your thinking.
Here’s another reason why the lack of daily reporting makes sense: Two hours spent with a high-value client is highly-valued time. So, if you take the following hours to debrief, go to dinner, and get an early night’s rest, that’s in good faith and qualifies as a deduction.
For local travel, commuting to work does not count as a tax deductible expense. However, you can deduct local travel expenses if your line of work involves driving to multiple locations throughout the day or week. For example, a realtor that travels locally to show homes will accrue expenses and those are tax deductible. The standard mileage rate is a reliable way to calculate mileage and gasoline expenses. Fortunately, the Internal Revenue Service (IRS) increased deductions from 58.5 cents to 62.5 cents per mile 2022
This rate is supposed to encompass all vehicle-related expenses such as gas, oil changes, repairs, and tolls. However, you may find that these expenses yield more tax savings when classified separately. Be sure to save a record of all these expenses.
Increase your marketing budget with confidence
Small businesses with up to 10M in yearly revenue still struggle to find the proper marketing budget. Typically, the budget is too low. When we talk about what business expenses are tax deductible for 2023, don’t overlook marketing. The marketplace is digital, crowded, and noisy. If you’re not thinking about marketing, not thinking about your brand, then now is the time to start. Marketing deductions give you assurance so you can get serious about reaching your audience.
What’s included in marketing and advertising deductions?
Marketing and advertising expenses include:
- Running social media advertisements.
- Paying a marketing agency to create a blog.
- Renting a booth at a local event.
- Printing costs associated with promotional materials such as brochures, mailings, flyers, and business cards are tax-deductible, as well.
And don’t forget consultant expenses. Consultants deliver valuable insights but charge high rates. Fortunately, marketing strategy is a tax-deductible expense. As long as your cash flow supports the monthly cost, your business can boost marketing initiatives, receive strategic marketing advice, and get the fees deducted from your tax bill.
Account for property depreciation with tax deductions
Using deductions for depreciation, business owners can write off expenses associated with normal wear and tear of business properties and equipment.
Under current IRS rules, a property’s assessed value is spread out over 27.5 years for rentals and 39 years for commercial buildings. (Eligible properties include any building relating to retail, as well as residential buildings with more than four units).
While most business owners know this, they may overlook the benefit of cost segregation analysis, which breaks down property into its depreciable components. The faster each component depreciates, the more immediate the tax deduction—and vice versa.
Choose reliable firms. Save your receipts.
Tax deductions are plentiful and open to many businesses across industries. Though deductions are incentives, the complexity of the US tax code is a hard barrier for business owners who do not seek qualified help.
Whether you choose Jeremy A. Johnson, C.P.A. PC or not, we recommend that you consult with an experienced and trusted firm that matches your business size, culture, and personality. Start local. That’s where you’ll find the best ROI.
Here are some tips: To keep track of your business expenses, you can do the following:
- Get an accounting software like QuickBooks;
- Use a separate credit card for business expenditures; and
- Save your paper receipts for food and travel.
If you want to save with deductions, switch to an experienced and modernized CPA firm.
Tax season is underway for all intents and purposes, and the window for maximizing tax deductions is closing. What business expenses are tax deductible for 2023? That depends on the state of your accounting.
So it would be best if you had an agile tax and accounting team to clean up your books and a CPA with tax planning experience to get the deductions your business is entitled to under the law. Consider upgrading to a modernized CPA firm.
There is still time to save; and frankly, any business with 1M – 10M in annual revenue employing a single accountant is not on the right track. As companies grow, tax and financial strategies become more valuable, closer to the money, and critical to decision-making.
Remember, deductions are incentives. Even though the codes are dense, the government wants your company to use its laws and regulations to build a resilient business, create wealth, and be a source of upward mobility and opportunity. Just say yes.
Jeremy A. Johnson, CPA, PC