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Are you missing out on opportunities to save thousands of dollars? Discover the most practical ways to reduce your tax liability. At NWALook, we’ve revealed the top eight applicable and practical ways to lower your tax liability.
If you use your vehicle for business purposes, whether visiting clients, attending meetings, or making deliveries, you have two options for deducting these expenses.
Mileage Deduction: For every mile you drive for work-related activities, such as to and from meetings, you can claim a deduction of 65.5 cents per mile.
Tracking Expenses: Alternatively, you can track all the expenses associated with your vehicle usage for business. A few of these cost includes the cost of fuel, maintenance, insurance, and even the vehicle registration fees. It may depend on how much you drive for work and the condition of your vehicle. If your business-related journeys are extensive, the mileage deduction might be simpler and more convenient. On the other hand, if your expenses are high due to regular maintenance or insurance costs, itemizing those expenses might be more beneficial for your bottom line.
Here is an app that you may use to track your mileage: MILEIQ
Home Office Deduction:
The COVID-19 pandemic brought on a significant shift in the way several people work, with remote work becoming the new norm for a substantial portion of the workforce. As a result, home office deductions have increased. If you use a portion or all of your home for your business, you may be eligible for a home office deduction. This can include deductions for mortgage interest, insurance, utilities, repairs, and depreciation of the space used for your office.
If you have a dedicated space in your home, such as a 12×12 room (144 sqft), you would multiply that by $5, which is the current rate for 2023, and you can write off $720 with a cap of $1500. As an alternative, you can elect to take a percentage of the home off of your taxes. If your home office is 144 sqft, and your total heated square footage of the house is 1800 sqft, you’ll be able to deduct 8% of the expenses, utilities, mortgage, etc.
Check out form 8829 for additional information.
Travel Expenses Conferences:
If your industry holds conferences out of the area, these travel expenses related to the conference may be deductible from your taxes. Items include plane tickets, checked bags, parking fees, rental cars, meals, hotel accommodations, dry cleaning, and anything associated with the trip that would be deemed necessary and ordinary. Note that if you decide to bring family along, make sure to separate those expenses as personal and not business.
Meals that are eligible for tax deductions are those incurred during valid business activities. This includes meetings with clients, employees, or potential business partners. Businesses can deduct up to 50% of the cost of meals incurred.
Capital expenses are investments in assets that provide long-term benefits to your business. They can’t be deducted in one go but instead need to be depreciated, amortized, or depleted over time. This category includes business startup costs, assets, and improvements. If you purchase land, a building, furniture, or office equipment such as a computer, these will all depreciate over time.
Routine Maintenance Safe Harbor:
Routine maintenance is essential to keep your business running smoothly. The IRS allows a “safe harbor” for maintenance that doesn’t improve property but preserves its existing condition. These expenses can be fully deducted. If you are a landlord and have a tenant who leaves your home in disarray, items such as cleaning, painting, and repairing damaged items would fall into this category. Businesses may also be able to update items such as lighting and painting and replace any worn-out items. These limit the time frame and amount of money spent per business, so it’s best to consult your accountant before beginning a project.
Cost of Goods Sold (COGS):
The cost of goods sold includes expenses related to raw materials, freight, storage, direct labor, and factory overhead. These costs are essential in determining your business’s taxable income. If you own a retail store, the items you purchase for resale or any freight to ship the items will fall into this category. The formula for calculating COGS can be found here.
2023 Max Net Earnings:
The maximum net self-employment earnings subject to the Social Security part of the employment tax is set at $160,200 in 2023. It’s important to know this cap when calculating your self-employment tax obligations. Understanding this cap is essential for self-employed individuals because it helps them calculate their self-employment tax obligations accurately and plan their finances accordingly. It’s a critical factor in determining how much you’ll owe in Social Security tax based on your net self-employment earnings for the year.
While these deductions offer great potential for small businesses in 2023, it’s essential to work closely with a qualified tax professional to ensure you are compliant with the latest tax laws and regulations. Proper documentation and record-keeping are critical, and an expert can help you maximize your write-offs while minimizing the risk of audits or penalties. Always remember that tax laws can change, so it’s essential to stay up-to-date and adapt accordingly.
Here are a few useful apps to help you with your small business tax deductions: