Many businesses miss out on a reduced tax bill because they don’t know what small business tax deductions and credits are available to them. And we hate to see it.
Founders and business owners don’t deserve to leave money on the table because we know how hard they’re working for every dollar. As we prepare for another busy tax season, here’s what you need to know to avoid missing out on an important startup tax break:
Tax Deductions vs Tax Credits
First, let’s break down the difference between a tax deduction and a tax credit. While both can help reduce your tax bill significantly, they each work a little differently.
A tax credit is an incentive that’s subtracted directly from the taxes that you owe. For example, if you qualify for a tax credit of $2,000 and have a tax bill of $4,000, that credit lowers your total to $2,000.
Unlike a tax credit, tax deductions reduce the amount of your income subject to taxes, which lowers your overall tax expense liability by the amount of the deduction multiplied by your marginal tax rate.
Now that we’ve gotten that out the way, let’s take a look at 5 startup tax deductions and 5 startup tax credits that can lessen the blow of your 2023 tax season.
5 Helpful Startup Tax Deductions
For the 2021 and 2022 tax years – The Consolidated Appropriations Act increased the meal expense deduction from 50 to 100 percent.
2. Advertising Expense Tax Deduction
Advertising expenses are 100 percent deductible and include newspaper, magazine, online, and TV advertisements. This category also covers online (SEO, newsletter) and direct marketing efforts, public relations, and the cost of brochures and business cards.
3. Travel Expenses Tax Deduction
The IRS defines travel expenses as ones that are ordinary and necessary when traveling away from home for business. This includes but is not limited to transportation, lodging, meals, parking, and toll fees.
4. Office Supplies Tax Deduction
Office supplies include your typical tangible items, like ink cartridges, cleaning supplies, pens, paper clips, staplers, paper, and furniture.
Office expenses are the expenses associated with running your office. This includes software and hardware, electronics, apps, website services, and domain names and hosting. Keep in mind that if an office expenditure exceeds $2,500, it might need to be capitalized as a depreciable asset.
5. Education Expense Deduction
Education expenses include reading and reference materials, courses, and workshops that help maintain or enhance your job skills or are mandatory to work in your profession. Some examples are online courses, seminars, conferences, ebooks, audiobooks, and magazine/newspaper subscriptions.
However, if the education costs qualify you for a new career or take you outside of your current business, you are not eligible for this deduction.
5 Helpful Startup Tax Credits
1. Research and Development Tax Credit
While the Research and Development (R&D) Tax Credit has been around for years, many businesses don’t realize that they qualify for this credit. You may be eligible for this credit if you’ve conducted research for the development and improvement of products or improved your business performance.
2. Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a federal tax credit for employers who hire individuals from groups that typically face issues with finding employment. These new employees include veterans, ex-felons, SNAP, TANF, and SSI recipients.
Employers who provide their employees with paid family and medical leave (FMLA) may qualify for the Family Leave Tax Credit. This credit does not apply if the FMLA leave is mandated by local or state law.
4. Business Energy Tax Investment Credit
If you’ve made changes to your business to be more energy efficient and environmentally friendly, then you might qualify for the Business Energy Tax Investment Credit. These changes include solar technologies, fuel cells, and geothermal systems.
5. Small Business Health Care Tax Credit
To be eligible for the Small Business Health Care Tax Credit, employers must have fewer than 25 full-time equivalent employees who earn an average of less than $60,000 a year in 2021 (indexed annually for inflation). They also must offer a qualified healthcare plan and pay at least 50 percent of the employee’s health care coverage.
Startup Tax Credits And Deductions FAQs
Q: Which is better: a tax credit or a tax deduction?
A: Well, for starters, that’s like asking what’s better: pizza or wings. They’re both great, right? They’re just different. A tax credit is a dollar for dollar reduction of your tax liability. Some tax credits even have the ability to take your tax liability past $0 and generate a refund. These are known as refundable credits. Tax deductions reduce your taxable income amount before your tax liability is calculated. If you itemize your deductions, you might be able to deduct state and local taxes, certain mortgage interest, and charitable contributions. It’s also important to know that certain credits and deductions have limitations and could potentially be limited or carried over to future years. We certainly don’t want you to leave your hard-earned money on the table. Schedule a meeting with one of our tax managers to review your unique situation so that you can utilize deductions and credits efficiently.
Q: What are considered advertising expenses?
A: This is one of CPA’s most common answers to questions they’re asked–it really depends. The IRS requires that business expenses be ordinary and necessary to be deductible. For example, a real estate agent could make a strong case for deducting vinyl wrapping their car to advertise their services. However, it would be much harder to make the same argument for a self-employment software engineer that works out of their home. In addition, if you’re considering having non-traditional advertisement expenses, such as TV, radio billboard, etc., please schedule a consultation with one of our tax managers to discuss your unique situation.
Q: What meal expenses are deductible?
A: In normal years, most ordinary and necessary business meal expenses are limited to 50%. There has been a temporary increase to allow a hundred percent deduction for business meal expenses if they were paid for or incurred after December 31st, 2020, and before January 1st, 2023. So we’ve still got about a year. Also the IRS’s requirement for employees to provide substantiation for the expenses has been lifted for expenses under a certain per DM rate. However, that does not mean your employer does not still require you to provide substantiation for your expenses, so make sure to save those receipts. The per DM rate threshold can also vary by city and state and what is considered an ordinary and necessary expense can vary from taxpayer to taxpayer. So reach out to one of our tax managers today to discuss your situation more specifically.
Q: What travel expenses are deductible?
A: Travel expenses that are deductible include any ordinary and necessary expenses incurred while traveling for business. The key words here again are ordinary and necessary. If you are flying first class and staying in five star hotels for every business trip, the IRS might not consider a hundred percent of your travel expenses to be ordinary and necessary. The same goes for a week-long trip to Hawaii, where you only had one business lunch. The IRS does in fact require the employee to provide substantiation for expenses over a certain per DM rate. And the same goes for travel expenses as meal expenses, the per DM rate threshold can vary by city and state. What is considered an ordinary and necessary expense can vary from taxpayer to taxpayer. So reach out to one of our tax managers today to discuss your situation more specifically.
Q: What office items are tax deductible?
A: Any ordinary and necessary expenses incurred while conducting your business can be deducted. Notice, ordinary and necessary again. A $5,000 top of the line gaming computer could be considered ordinary and necessary for a video game designer, but maybe not for a person who owns a landscaping company.
Q: Is health insurance a tax write off for small businesses?
A: Yes, health insurance can be deducted for the self-employed and their employees. However, the portion related to the owner’s health insurance has different tax reporting requirements than the employee’s health insurance. The tax reporting requirements vary depending on if the business is taxed as a sole proprietor, a partnership or an S corporation reach out today to schedule a consultation with one of our tax managers to discuss the correct way to report your health insurance expenses. If you have any more questions, reach out to our team directly at acuity.co.
Get Ahead of the Curve on Startup Tax Deductions and Credits
It’s never too early to prepare for tax season — especially when you’re running a business. Getting ahead of the curve now to save you time, money, and a lot of headaches.
And if you’re already dreading filing your taxes, consider offloading the work this year! Our bookkeepers are prepared to get your year-end financials in order while our CPAs will ensure you’re staying compliant while getting as much money back as possible.
As for you? You can sit back and relax, knowing that it’s all being taken care of accurately and on time!
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