Small business owners should pay close attention to the numerous tax changes for 2023.
Every year, the Internal Revenue Service (IRS) makes adjustments to personal exemptions, standard deductions, tax brackets, and other tax credits to account for changes in the cost of living.
According to the IRS, more than 60 tax provisions were recently adjusted for inflation.¹ And we can add a slew of new legislation (and expired legislation) relating to taxes. Take the Inflation Reduction Act. It’s a monster, and it will affect small businesses’ tax bills.
New deductions, credits, laws, and newly expired regulations apply to the upcoming tax deadline and to 2024. Are the changes good or bad? It’s a mixed bag.
Three not-so-good tax changes for 2023
If you’re a small business owner with $500K plus in revenue, the three points could affect your strategy for gaining and retaining clients, employment practices, and acquisition of depreciable equipment. Take a look.
1. The meal & entertainment party is over
In response to the Covid-19 pandemic, businesses could deduct 100% of qualifying meals and entertainment for 2021 and 2022, presumably an effort to help boost spending at restaurants.
For 2023, the deduction will be back to 50%. So take advantage of 2022 taxes, but don’t expect to continue to save big on meals moving forward.
2. The ERTC is gone (but you may be able to claim it for previous years)
The Employee Retention Tax Credit (ERTC) was introduced to motivate businesses to retain their workforce during the pandemic. It only applies to wages paid before Oct. 1, 2021, so you can’t claim it in this year’s tax return.
However, you can still modify your 2020 and 2021 returns to claim the ERTC, which was worth up to $7,000 per quarter per employee. Generally, tax returns can be amended within three years after being filed.
Your business may qualify for the ERTC if
- you were instructed by the government to pause operations in 2020 or 2021 because of Covid-19; or
- your revenue declined by more than 50% in 2020 or over 20% in 2021 compared to 2019.
3. The golden age of depreciation has come to a close
From mid-2017 through the end of 2022, businesses that bought certain expensive equipment could claim 100% of their bonus depreciation in the same year of purchase rather than spreading it out over the equipment’s lifespan.
Moving forward, 100% bonus depreciation is no more. As of 2023, bonus depreciation decreases to 80%. The percentage will continue to decrease by an additional 20% annually: to 60% in 2024 and until expiration in 2027.
But remember, you can still claim 100% bonus depreciation on this year’s taxes.
Three very good tax changes for 2023
1. Enjoy a lower threshold for the Qualified Business Income Deduction (QBI)
Your small business may be eligible to claim a deduction of up to 20% of its qualifying income as part of the Qualified Business Income Deduction (QBI).²
The following types of businesses are eligible for the deduction:
- Limited liability companies (LLCs)
- Sole proprietorships
- Partnerships
- S corporations
Here’s the change for the tax year 2023: You can claim the full deduction if your business income is under $170,050 if you’re single or head of household or under $340,100 if you’re filing jointly as married taxpayers.
2. Build green, drive green, and save on taxes
2023 may be the year for you to execute an energy-efficient renovation. With the passage of the Inflation Reduction Act³ in August 2022, there are now several tax credits and business deductions available for those who decide to go green.
The expansion of the Energy-Efficient Commercial Buildings Deduction (EECB) enables business owners to claim larger deductions per square foot of renovation if their projects meet the requirements.
Businesses can also take advantage of a tax credit for up to $7,500 when they purchase electric or fuel cell electric vehicles in 2023. That credit can increase to $40,000 for vehicles larger than 14,000 pounds.
3. Retain employees with tax credits for retirement plans
Businesses employing up to 50 individuals can now obtain a tax credit for the complete cost of initiating a retirement plan of up to $5,000. Qualifying small businesses can also request a credit of $1,000 for each employee’s plan.
Businesses with 51 to 100 employees are also eligible, but the credit decreases to cover only 50% of expenses.
Small businesses should always be looking for ways to make themselves more competitive in attracting top-quality employees. If you don’t already offer a retirement plan for your workers, look to invest in one this year.
Stay on top of tax changes
All certified public accountants (CPAs) will help you submit your taxes accurately and on time, but for most small or growth-stage businesses, that’s simply not enough—you need a proactive CPA who will actively attend to your requirements.
I recently read an article by Julio Gonzalez at Forbes, and he captured the difference perfectly: “A proactive approach is crucial to optimal wealth preservation, but the general attitude of CPAs is often reactive.”⁴
Talk soon,
Jeremy A. Johnson, CPA
References
- IRS provides tax inflation adjustments for tax year 2023 [Internet]. Irs.gov. Available from: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
- Facts about the qualified business income deduction [Internet]. Irs.gov. Available from: https://www.irs.gov/newsroom/facts-about-the-qualified-business-income-deduction
- Congress.gov. H.R.5376 – Inflation Reduction Act of 2022. Available from: https://www.congress.gov/bill/117th-congress/house-bill/5376/text
- Gonzalez J. Your choice of CPA could be costing you more than you think [Internet]. Forbes. 2019. Available from: https://www.forbes.com/sites/forbesfinancecouncil/2019/02/19/your-choice-of-cpa-could-be-costing-you-more-than-you-think/?sh=792782ce4674