Small business tax deductions are important in order to offset high business taxes levied against small business owners and entrepreneurs. This is especially true for work from home entrepreneurs who file as sole proprietors, or as a Limited Liability Company aka LLC, with sole proprietor tax status. Small business owners can get hit with high tax bills thanks to Self-Employment Taxes.
Self-employment tax, or SE Tax, is so high because it includes taxes that would usually be paid by the employer. In a typical employer-employee scenario, the employee pays 6.2% in Social Security Taxes. The employer withholds this amount from the employee’s paycheck. What many people don’t realize is that the employer also pays 6.2% in social security tax for the employee.
A small business owner that files as a sole proprietor is on the hook for the whole amount! The self-employment tax rate – sometimes called the SE tax rate – is 15.3%, which is 12.4% for social security taxes plus another 2.9% for Medicare taxes.
That 15.3% is on top of regular Federal Income Taxes. A successful small business owner in the 30% tax bracket, pays a blood curdling 45% tax rate. And that is before adding Medicare tax and state and local taxes.
In other words, a small business owner can easily end up paying 50% taxes!
Deduct Self-Employment Tax
The only good news in this whole equation is that half of the self-employment tax can be deducted when figuring adjusted gross income. Of course, this is a small consolation because it results in under 2% tax savings. To keep from paying too much income tax, the entrepreneur needs to find bigger tax deductions and other small business tax breaks.
Some of the biggest small business tax deductions come from the purchase of equipment for the business. Unfortunately, big purchases are often considered capital expenditures that must be depreciated over the “useful life” of the product. The best small business tax advice is to get accelerated depreciation whenever possible to get higher tax deductions now.
Even if your business is a sole proprietor 179 deductions can work to save you money on your Section C income.
The only defense against high taxes from running a small business is to get as many business tax deductions as possible. The business lowers its profit for tax purposes and passes along less income to the business owner on Schedule C – Profit and Loss From Business Operations.
Section 179 Deduction 2023
IRS Section 179 allows for better small business tax deductions and bonus depreciation in some cases. A section 179 expense allows for business expenditures to be deducted immediately, instead of depreciated. This is very useful for dated tax depreciation limits like those that apply to high-tech equipment.
For example, a freelance writer needs a netbook for his freelance writing business. With a Section 179 deduction, the small business owner deducts $200 in the year the netbook was purchased, instead of deducting a measly $40 per year for five years.
The 2021 Limit for Section 179 Deductions is $1,160,000 for qualified capital expenditures. That amount is reduced if the Section 179 property exceeds $2,890,000
Maximizing Section 179 Tax Deductions is important personal finance advice for any entrepreneur. You may also be interested in the IRS Mileage Rates and the amount for the standard deduction.
How do you save on your small business taxes?
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By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. Please note material is not updated regularly and some of the information may not be current. Consult with your own financial professional when making decisions regarding your financial or investment options
6 thoughts on “2023 Section 179 Deduction Limits for Small Businesses Taxes”
Nothing makes me more angry than the self-employment tax and the kicker is that the IRS only lets you deduct half of what’s paid to SE tax rather than the entire amount when calculating your income taxes. One way to get around the SE tax is to file as an S-Corp and pay yourself reasonable wages, so the balance of your business income doesn’t get his with SE tax.