Even if you work with a tax professional to manage your business and personal tax filings, as well as general financial tax planning, it’s important to be aware of the credits and deductions available to you each year. Many tax benefits require careful planning and strategic spending to make the most of the credit or deduction.
The sooner you know what’s available to you, the better you can plan to maximize every dollar. In this article, we’re covering the top five tax deductions and credits every small business should be aware of in 2023 — while you still have time to leverage the savings through sound financial tax planning.
1. Energy-efficient upgrades
In 2023, some energy efficient upgrades made to your home office can be eligible for a valuable tax credit. For example, some small business owners can receive up to 30% of the cost of their alternative energy equipment (like solar panels or wind turbines) back as a tax credit when they file their 2023 returns.
New doors, windows and an energy-efficient roof can also be eligible for a tax credit.
2. Medical expenses
Self-employed individuals who purchase their own insurance can deduct their health and dental insurance premiums, doctor’s fees, prescription costs, home health care costs and more. If you provide health insurance to your employees, you may also be able to deduct the cost of those paid premiums.
Plus, both small business owners and employees can deduct contributions to their health reimbursement arrangement (HRA), flexible spending account (FSA) or health savings account (HSA).
The rules governing which health-related expenses are tax-deductible are complex. It’s always a good idea to work with a financial tax planning professional or accountant for guidance on which expenses you’re allowed to deduct, to ensure you remain in compliance with your local tax laws.
3. Startup research and development expenses
Did you know your startup’s R&D costs can be offset with the Research and Development Tax Credit? The credit is designed to encourage new and growing startups to solve new problems, develop innovative products and expand technology.
The R&D tax credit has no limit if used to cover your income tax liability, and is worth up to $500,000 when applied to your payroll taxes in 2023. To be eligible, your startup must have at least $5 million in gross receipts, be no more than five years old and conduct qualified research.
As an added benefit, this tax credit can be applied retroactively. If you were unaware of the R&D tax credit last year, you can claim past credits as far back as four years ago.
Plus, this tax credit can be carried forward for up to 20 years, meaning you can use the credit to reduce your future tax liability for up to two decades.
4. Loan interest for investments
The loan interest investment deduction is one tax benefit that helps your small business in two ways. First, it reduces your tax liability by decreasing your taxable income. That shrinks your tax bill and may even push your business down into a lower tax bracket.
Secondly, as the loan interest deduction reduces your tax bill, you have more free cash to invest — which generates compounding returns. As your cash flow increases, so do your opportunities to invest, save, or grow your business.
When leveraging the loan interest tax deduction, you can deduct interest expenses up to the amount you earned on the matching investment. For example, if you earned $10,000 on a given investment in 2023, you can deduct up to $10,000 in interest on the loan you used to make that investment.
5. Education-related deductions
While there isn’t an education tax deduction specifically available for small businesses, small business owners may be able to take advantage of certain tax deductions and credits related to their personal education.
For example, as a small business owner, you may be able to deduct certain educational expenses as business expenses. As long as your expenses are related to your job and must be necessary to maintain or improve your skills in your current field, they can be eligible.
Courses, college tuition, books and fees are all commonly deducted educational expenses. Additionally, if you offer educational assistance to your employees as a benefit, you may be able to take advantage of the Employer-Provided Educational Assistance exclusion.
Under this exclusion, you’re allowed to provide up to $5,250 in educational assistance to each employee each year, and the assistance is not subject to income or payroll taxes. This tax benefit is a great way to encourage your employees to continue their professional development while keeping your top talent incentivized to stay.
To make the most of the small business tax deductions and credits available to you, always consult a tax professional!
This is a short list of the dozens of tax credits, deductions and incentives available to small businesses. And only an experienced professional knowledgeable in financial tax planning can recommend tax benefits that match your unique situation.
But with the right professional in place, and careful documentation to back up every tax credit and deduction you take advantage of, you have the opportunity to enjoy significant tax savings in 2023 and beyond.
Want more? In addition to taxes, accounting, bookkeeping and CFO services through its FinOps, Escalon’s Essential Business Services include PeopleOps (HR, benefits, recruiting and payroll) and Risk (business insurance). Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.