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The 2023 tax year ended for calendar-year businesses on December 31, 2023. You closed your books and made resolutions for 2024. But there’s still one chore remaining that relates to 2023, and that’s filing a federal income tax return to report your business activities. While 2023 is over, it’s not too late to make certain tax decisions that can minimize your tax bill for 2023.
How will you write off the cost of equipment purchases?
If you bought machinery, equipment, and off-the-shelf software for your business in 2023, you have several ways to write off the cost:
Use regular depreciation to spread write-offs over a set number of years (depending on the type of property involved).Elect Sec. 179 (first-year expensing) deduction up to $1,160,000 for 2023 purchases. This only works if you’re profitable and you must affirmatively elect the deduction; it’s not automatic.Forego bonus depreciation of 80% of the cost of the property. Bonus depreciation applies automatically unless you elect out.Treat equipment as non-incidental materials and supplies. They’re not added to the balance sheet but are immediately deductible up to $2,500 per item or invoice.
Some points to consider:
Financing purchases in whole or in part has no impact on tax write-offs.Profit or loss this year and projections for the future impact your write-off decisions.You must have placed the property in service by the end of 2023. It’s not good enough that you paid for it if you didn’t take delivery.Factors in state income tax rules may differ from federal rules. For example, California does not allow bonus depreciation; Ohio does not allow the Sec. 179 deduction.
For more information, see IRS Publication 946.
Set up a qualified retirement plan?
Did your business have a 401(k) or other qualified retirement plan in place for 2023? If not, you can still set one up and fund it as a way to minimize the tax bite on your profits. For example, you can set up a SEP and make deductible contributions for 2023 as late as the due date of your return…or the extended due date if you have requested an extension. See your retirement plan options in IRS Publication 560. Do a cost-benefit analysis: what you save in taxes, and the benefit you provide to employees who must be covered by your plan if certain conditions are met versus the cost of setting up the plan, funding it, and administering it.
Note: You may qualify for a tax credit for setting up a plan. This helps to reduce your cost.
Use the IRS standard mileage rate?
If you use your personal vehicle for business driving, you can deduct the expense of business driving based on your actual costs for gas, repairs, insurance, etc., or rely on an IRS-set standard mileage rate (65.5 cents per mile for 2023). The option applies whether you own or lease the vehicle.
To use the standard mileage rate for a vehicle you own, you must choose to use it in the first year the vehicle is available for use in your business. In later years you can then choose to use the standard mileage rate or actual expenses. But if you lease a vehicle and choose the standard mileage rate for the first year, you have to stick with it for the entire lease period.
Note: Whichever method you use, you must have a record to prove your business driving—the odometer reading, date and destination of each trip, and more.
Use a simplified method for a home office deduction?
If you work from home, you may qualify for the home office deduction. Like business driving, there are two ways to figure the write-off: actual costs or an IRS simplified method. The actual expense method requires you to keep records of home-related costs and do a lot of computations. The IRS simplified method merely requires you to multiply the square footage of business space by $5, but is limited to a maximum deduction of $1,500.
You can toggle between these methods from year to year, as long as you qualify for the home office deduction. See IRS Publication 587.
Conclusion
As you prepare your 2023 federal income tax return—by yourself or with a tax professional—be sure to explore your election options. They can favorably impact your current return and have consequences for years to come.
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