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Publication 334 2023

by | Jul 29, 2024 | IRS Publications

Tax Guide for Small Businesses 2023

Publication 334 of the IRS provides an overview of federal tax laws applicable to small businesses and self-employed individuals. This guide covers various important aspects, including types of business income, deductible expenses, tax credits, and tax obligations. Its purpose is to help small business owners and self-employed individuals prepare their tax returns accurately and in compliance with current laws.

Introduction

Publication 334 is an essential guide for small business owners and self-employed individuals, providing detailed information on tax obligations and ways to maximize tax deductions. The guide addresses the latest tax updates and offers a clear breakdown of the different taxes and forms needed to comply with federal tax regulations.

What’s New for 2023

Key Changes

For the year 2023, several important tax changes have been implemented that small business owners need to be aware of:

  1. Maximum Net Earnings: The maximum net self-employment earnings subject to the Social Security part of the self-employment tax is $160,200 for 2023.
  2. Standard Mileage Rate: The standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use during 2023 has increased to 65.5 cents per mile.
  3. Redesigned Form 1040-SS: Schedules C and SE (Form 1040) are available to be filed with Form 1040-SS, if applicable.
  4. Bonus Depreciation: The bonus depreciation deduction under section 168(k) begins its phaseout in 2023 with a reduction of the applicable limit from 100% to 80%.
  5. Form 7205: This form and its separate instructions are used to claim the section 179D deduction for qualifying energy-efficient commercial building expenses now reported on the new line 27b of Schedule C (Form 1040).

Other Changes

In addition to the highlighted updates, there are several other changes for 2023 that may affect small businesses and self-employed individuals:

  • Commercial Clean Vehicle Credit: Businesses that buy a qualified commercial clean vehicle may qualify for a clean vehicle tax credit.
  • Business Meal Expense: The temporary 100% deduction for business meal expenses has expired. The business meal deduction reverts to the previous 50% allowable deduction beginning January 1, 2023.

Filing and Paying Business Taxes

Types of Taxes

Small business owners may be subject to several types of taxes, each with its own forms and due dates:

  1. Income Tax: Form 1040 or 1040-SR with Schedule C must be filed.
  2. Self-Employment Tax: Schedule SE must be filed with Form 1040 or 1040-SR.
  3. Employment Taxes: Includes Social Security and Medicare taxes, federal income tax withholding, and federal unemployment tax (FUTA).

Required Forms

The guide details the specific forms small business owners need to use to report different types of taxes:

  • Form 1040/1040-SR and Schedule C: To report business income and expenses.
  • Schedule SE: To calculate self-employment tax.
  • Forms 941 and 944: To report Social Security and Medicare taxes and federal income tax withholding.

Identification Numbers

Types of Identification Numbers

It is crucial for small business owners to use the correct identification numbers when filing their taxes:

  • Social Security Number (SSN): Generally used by individuals for their personal tax returns.
  • Individual Taxpayer Identification Number (ITIN): The IRS issues ITINs to people who are not eligible for SSNs.
  • Employer Identification Number (EIN): Required for businesses that pay wages to employees or file pension or excise tax returns.

How to Obtain an Identification Number

Individuals and businesses must follow proper procedures to obtain their identification numbers:

  • SSN: Apply using Form SS-5 from the Social Security Administration (SSA).
  • ITIN: Apply by attaching Form W-7 with a complete tax return and required documentation.
  • EIN: Apply online on the IRS website or using Form SS-4.

Accounting Periods and Methods

Accounting Periods

Small business owners must choose an appropriate accounting period to report their income and expenses:

  • Calendar Tax Year: A period of 12 consecutive months beginning January 1 and ending December 31.
  • Fiscal Tax Year: A period of 12 consecutive months ending on the last day of any month except December.

Accounting Methods

Businesses must use a consistent accounting method that clearly reflects their income:

  • Cash Method: Income is reported in the year it is received, and expenses are deducted in the year they are paid.
  • Accrual Method: Income is reported in the year it is earned, and expenses are deducted in the year they are incurred.

Business Income

Types of Income

The guide provides a detailed description of the different types of business income that must be reported on the tax return:

  • Sales Income: Includes sales of goods and services.
  • Service Income: Fees for professional services, rents, royalties, etc.
  • Other Income: Interest, dividends, investment income, etc.

Calculating Gains and Losses

It explains how to calculate gains and losses from the disposition of business property and where to report them on the tax return.

Cost of Goods Sold

Calculating Cost

For businesses that sell products, calculating the cost of goods sold is necessary to determine gross profit accurately:

  1. Beginning Inventory: The value of the inventory at the beginning of the fiscal year.
  2. Purchases: The cost of goods purchased during the year.
  3. Ending Inventory: The value of the inventory at the end of the fiscal year.

Business Expenses

Deductible Expenses

The guide lists several business expenses that are deductible on the tax return:

  • Bad Debts: Debts considered uncollectible.
  • Vehicle Expenses: Costs of operating a vehicle for business use.
  • Depreciation: Reduction in the value of business property.
  • Employee Pay: Wages and benefits paid to employees.
  • Insurance: Business insurance premiums.
  • Interest: Interest paid on business loans.
  • Legal and Professional Fees: Costs of legal and accounting services.
  • Rent: Costs of renting business property.
  • Taxes: Taxes paid by the business.
  • Travel and Meals: Business-related travel and meal expenses.
  • Business Use of Home: Expenses related to using the home for business.

Non-Deductible Expenses

It also describes expenses that are not deductible, helping owners avoid common errors in their tax returns.

Net Profit or Loss

Calculation

Guidance is provided on how to calculate net profit or loss, handle net operating losses, and report activities not conducted for profit.

Self-Employment Tax

Who Must Pay

The guide specifies who must pay self-employment tax and how it is calculated:

  • Self-Employment Tax Rate: 15.3% (12.4% for Social Security and 2.9% for Medicare).
  • Maximum Net Earnings: Only the first $160,200 of combined earnings in 2023 are subject to the Social Security part of the self-employment tax.

Reporting

Details on how to report self-employment tax using Schedule SE and how to deduct half of the self-employment tax as an adjustment to income.

Taxpayer Rights

Rights During Proceedings

The guide offers an overview of taxpayer rights during examinations, appeals, collections, and refunds, ensuring that small business owners understand their rights and responsibilities.

This detailed guide provides small business owners and self-employed individuals with the necessary information to meet their tax obligations.