The 2023 tax year wrapped up for calendar-year businesses on December 31, 2023. You’ve closed your books and set some goals for 2024, but there’s still one important thing left to do for 2023: file your federal income tax return. While the year is over, you can still make some tax decisions to reduce your tax bill for 2023.
### How to Deduct Equipment Costs
If you purchased machinery, equipment, or off-the-shelf software for your business in 2023, you have several options for writing off these costs:
1. **Regular Depreciation**: Spread the write-offs over several years, based on the type of property.
2. **Sec. 179 Deduction**: You can deduct up to $1,160,000 for 2023 purchases, but this is only available if you’re profitable and must be specifically elected—it’s not automatic.
3. **Bonus Depreciation**: Automatically applies an 80% deduction on the cost unless you choose to opt-out.
4. **Non-Incidental Materials and Supplies**: Instantly deduct up to $2,500 per item or invoice without adding them to the balance sheet.
### Points to Keep in Mind
– Whether you financed your purchases doesn’t affect the tax write-offs.
– Your profit or loss this year and future projections can influence your write-off choices.
– You must have put the property into use by the end of 2023, just paying for it isn’t enough.
– State tax rules might differ from federal ones. For example, California doesn’t allow bonus depreciation, and Ohio doesn’t allow the Sec. 179 deduction.
### Setting Up a Retirement Plan
If your business didn’t have a 401(k) or other qualified retirement plan in 2023, you can still set one up and fund it to reduce your tax burden. For instance, setting up a Simplified Employee Pension (SEP) allows you to make deductible contributions for 2023 by the due date of your return, or the extended due date if you’ve asked for an extension. Weigh the tax savings and benefits to your employees against the costs of setting up and managing the plan. You might also qualify for a tax credit to help offset the setup costs.
### Standard Mileage Rate for Business Driving
If you use your personal vehicle for business, you can deduct expenses based on actual costs like gas and repairs, or you can use the IRS standard mileage rate, which is 65.5 cents per mile for 2023. For a vehicle you own, you must pick the standard mileage rate in the first year and can switch methods in later years. For leased vehicles, you must stick with the standard mileage rate for the entire lease period. Keep detailed records of your business driving, including odometer readings and trip details.
### Home Office Deduction
For those working from home, the home office deduction is available. You can choose between actual expense deductions or use the IRS simplified method, which involves multiplying your business space’s square footage by $5, capped at $1,500. You can switch methods each year if you qualify for the deduction.
### Conclusion
As you work on your 2023 federal income tax return, either by yourself or with a tax professional, take the time to explore all your options. Making strategic choices now can lower your tax bill and impact your finances positively for years to come.
