Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2023.
1. Prepay Expenses Using the IRS Safe Harbor
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2023 prepayments cannot go into 2025. This makes sense because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include (among others) lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example: You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 29, 2023, you mail a rent check for $36,000 to cover all of your 2024 rent. Your landlord does not receive the payment in the mail until Tuesday, January 2, 2024. Here are the results:
You deduct $36,000 this year (2023—the year you paid the money).
The landlord reports $36,000 as rental income in 2024 (the year he received the money).
You get what you want—the deduction this year.
2. Stop Billing Customers, Clients, and Patients
Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2023. (We assume here that you or your corporation is on the cash basis and operates on the calendar year.)
Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.
Example: Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2023 income by moving that income to 2024.
3. Buy Office Equipment
Qualifying Section 179 and bonus depreciation purchases include new and used personal property such as (among other types) machinery, equipment, computers, desks, furniture, and chairs (and certain qualifying vehicles).
You can likely use Section 179 to deduct 100 percent of the cost of machinery, equipment, computers, desks, furniture, and chairs. Alternatively, bonus depreciation would give you an 80 percent deduction plus a 5 to 20 percent MACRS depreciation deduction.
4. Use Your Credit Cards Correctly
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit cards for last-minute purchases of office supplies and other business necessities.
If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.
5. Don’t Assume You Are Taking Too Many Deductions
You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.
Remember, all deductions are valuable. And you know that you must claim all your deductions to keep your taxes to their rightful amount.
If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.
If you are just starting your business, or with all that’s happened this year, you could very possibly have an NOL. And the good news is that NOLs can turn into future cash infusions for your business because you carry 2023 NOLs forward to future years.
6. Deal with Your Qualified Improvement Property (QIP)
QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date the building was first placed in service.
The big deal with QIP is that it’s not considered real property that you depreciate over 39 years. QIP is 15-year property, eligible for
immediate deduction using Section 179 expensing, and
80 percent bonus and MACRS depreciation.
To get the QIP deduction in 2023, you need to place the QIP in service on or before December 31, 2023.
With a little tax planning, you may be able to make a big impact on your 2023 taxes. Please call us to discuss setting up a tax planning meeting to review your specific situation and see how DP Financial or the Tax Pros at our sister office can help you!