As a small business owner, it’s important to stay up to date on tax laws. Several changes to the federal tax code will affect small businesses this tax year. Read this guide to find out the most important things to know about filing taxes next year.
The following changes are in effect for the 2023 tax year, which you prepare and file in 2024.
The SECURE Act increases the Section 45E credit for all or a portion of employer contributions to small employer pensions for the first five employer tax years, starting in 2023. The credit for employer contributions is capped at $1,000 per employee. The full credit is available to employers with 50 or fewer employees and is phased out completely for employers with more than 100 employees.
The rules around how to claim a net operating loss are changing this year. A net operating loss occurs when your deductions exceed your gross income. As a general rule, you can carry the loss forward to offset income in later years. You cannot offset more than 80% of your taxable income.
However, a net operating loss generated in 2018, 2019 or 2020 that you are carrying forward is not subject to the 80-percent-of-taxable-income limit. For net operating losses generated after 2020, the 80-percent-of-taxable-income limitations again apply.
Through a temporary suspension of Tax Cuts and Jobs Act rules in 2019 and 2020, businesses could carry net operating losses back five years or carry them forward indefinitely. However, the suspension has ended. Taxpayers cannot deduct losses of more than $540,000 per year if married filing jointly or $270,000 if single. This applies to all business income and losses, including Schedule C and pass-through-entity income and losses. You can carry forward losses in excess of these amounts to lower your taxable income in future years.
In addition, W-2 wages can no longer be used to offset the business losses. Spousal income is taxed separately and may result in a tax bill even if the business losses are greater than the spousal income.
The interest expense limitation rule generally limits the amount of deductible interest expense for the year to the total of the following:
This tax rule was temporarily suspended during the pandemic, but it is back in force in 2022 and beyond.
The charitable contribution rule that allowed C corporations and individuals to deduct a greater percentage of their income for charitable contributions is no longer in force for the 2023 tax year.
According to the American Rescue Plan Act of 2021, beginning in tax year 2022, small business owners and freelancers who receive more than $600 from third-party digital platforms were scheduled to receive Form 1099-K reporting that income. Platforms such as Amazon, Etsy and eBay also were to report this income to the Internal Revenue Service.
After pushback from taxpayers and businesses, this requirement has been postponed for one year. If it’s applicable to your business, expect to receive a Form 1099-K in 2024 for the 2023 tax year.
A tax professional can help make sure your business taxes are correctly prepared and filed in accordance with the latest federal, state and local laws.
Since 2020, filers can deduct only up to $10,000 in state and local property and income taxes. The deduction is the same for single filers and couples filing a joint return.
Many business owners who operate a pass-through entity in a high-tax state find their deductions limited by SALT rules. Wayne Winegarden, senior fellow and director of the Center for Medical Economics and Innovation at the Pacific Research Institute, said all business owners should be aware of this cap. “I really think in the high-tax states, the SALT cap is going to be meaningful, more for small businesses, just because they’re going to be filing through their personal taxes,” he said.
The tax reform law created a significant deduction for both pass-through and corporate entities. Pass-through businesses are small businesses structured as S corporations, limited liability companies (LLCs), sole proprietorships and partnerships. Pass-throughs make up approximately 95 percent of U.S. businesses. The law now provides a 20 percent deduction for those businesses. The 2022 deduction phases out at taxable income levels between $170,050 and $220,050 (between $340,100 and $440,100 for joint filers), and the 2023 phase-out levels will be adjusted for inflation. This deduction is set to expire at the start of 2027.
C corporations also got a big tax benefit: The Tax Cuts and Jobs Act lowered the corporate tax rate from 35 percent to 21 percent in a bid to bring major corporations back to the U.S. to employ workers and create wealth.
The first-year bonus depreciation deduction was changed to 100 percent through the end of 2022. In other words, businesses that made eligible equipment and property purchases could deduct the full purchase price instead of writing off a portion of it each year. This provided businesses with more money upfront, which lawmakers hoped would be invested back into the business or be used to hire workers.
Starting with the 2023 tax year, the 100 percent bonus depreciation amount is scheduled to be reduced every year. Josh Zimmelman, founder of Westwood Tax & Consulting, said this enables businesses to write off the cost of assets in one shot.
“A company can invest in vehicles, computers and equipment, and claim the entire expense on their … tax return,” Zimmelman said.
Winegarden said the break is an incentive for businesses to spend more. “Anything that gets you closer to complete expensing is going to increase the value of the depreciation, lower the tax burden and reward those capital-intensive firms,” he said.
Some provisions from the 2018 tax reform law may still affect your business today.
Take note of the following tax deadlines for 2023:
This isn’t a comprehensive list of tax deductions available to small businesses (and you need to ensure your business is eligible for these deductions), but it’s a great starting point:
Small business taxes vary based on the structure of the business, but here are the five primary small business taxes:
Small businesses must account for several types of taxes, including income tax, self-employment tax, employment taxes and excise tax. These vary based on your company’s structure, but there are ways to reduce your business’s tax liability.
If you started your business in 2023, remember these key takeaways:
Business travel is 100 percent deductible, but personal travel isn’t deductible at all. So, if you have airline or hotel points, use them for your personal travel and pay cash for your business travel expenses.
It’s important to be proactive about tax planning for your business. Waiting until the last minute makes tax preparation more complicated and limits your money-saving options. Keeping up with current and future tax changes helps keep you in charge so you can maximize all tax benefits and run a profitable business.
Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.