Learn How New Tax Rules Could Impact Your Business
Well, it’s everyone’s least favorite season. No, not winter. Tax Season. Ugh!
There is no denying filing tax returns is an unpleasant task. Most small business owners find it stressful and daunting. Being prepared to keep as much of your money as possible by paying less to the IRS can help lower that stress and improve your cash flow.
Several new tax changes have come into effect in 2023, impacting the taxes your small business may be responsible for next year. It’s important to be aware of these new rules early in the year so you can make any necessary changes needed to keep your tax bill as low as possible.
Equipment Purchases
The bonus depreciation deduction applies to property or asset purchases with at least a 20-year useful life. If you have some equipment purchases planned for 2023, you should be aware that bonus depreciation has been decreased to 80%, down from 100% in 2022. Bonus depreciation is being reduced 20% per year and will be phased out in 2027. If you have any major asset purchases planned, you will get the most benefit from this deduction in 2023.
If you purchased an electric vehicle after August 16, 2022, you might qualify for the new Federal EV Tax Credit. The new credit allows up to $7,500 courtesy of the Inflation Reduction Act. There is still a lower tax credit available for purchases of electric vehicles prior to August 16, 2022.
Deductions for Travel and Business Meals
The deduction for business meals in 2023 has been cut to 50%. Whether your business uses the actual money spent or the standard rates supplied by the General Services Administration (GSA) or the IRS, the new tax laws only allow 50% beginning this year.
The standard mileage rate for travel has been increased to 65.5 cents per mile, up 3 cents from the 2022 mid-year adjustment. Be sure to use the new rate when reimbursing employees for the business use of their personal vehicles. Remember to keep a travel log to back up the deduction your small business takes for mileage driven by you and your employees.
Employee Benefit Deductions
If you own a small business with 50 employees or less and plan to set up a pension plan in 2023, you can now deduct up to 100% of the start-up costs for the pension plan. This is double what was previously allowed. Generally, the additional credit is calculated as a percentage of what the employer contributes for employees, with the maximum set at $1,000 per employee. The increased credit begins to phase out for employers with 51 employees or more.
Increased contribution and benefits limits are in place for qualified retirement plans. Check the IRS website to see which increases may benefit you and your employees.
Limited Deductions
The new tax rules have limited some common deductions typically used by many small business owners.
- Interest Expense Deduction. The limitation on interest expense deductions were temporarily lifted during the pandemic, but are reinstated beginning in 2022. The maximum interest expense deduction allowed is: 30% of your adjusted taxable income, interest income from your business, and the business floor plan financing interest expense.
- NOL Carryforwards. If your business deductions are higher than your business income, you have a net operating loss (NOL). As a general rule, you can carry forward a NOL to future tax years and offset up to 80% of your taxable business income. However, if your business incurred an NOL during 2018-2020, you are not limited to the 80% rule. Any NOL after 2020 will be subject to the 80% limitation.
- Charitable Contributions. The temporary rule enabling individuals and C corporations to reduce a higher percentage of income for charitable contributions has ended in 2023.
If your small business relies on any of these deductions to reduce your tax bill, you should plan to offset your taxes by maximizing your allowable deductions in another category.
Plan Ahead
These tips are not a comprehensive list of the new tax changes. Be proactive and plan now to take advantage of the best tax strategy for your growing business. Speak with your tax preparer and discuss how best to take advantage of the new tax rules in 2023.