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As a small business owner, you know that managing your business comes with a lot of responsibilities. There’s always a lot on your plate, from tracking expenses and managing employees to implementing new strategies and utilizing the right accounting software. And on top of all that, you need to stay updated on the ever-changing tax laws that can significantly impact your business. As we move farther into 2023, there are some important tax changes that every small business owner should know. Let’s take a closer look at what you need to know.
Bonus depreciation fade out
From 2017 to 2022, business owners who made eligible equipment and property purchases could claim up to 100% of the asset’s bonus depreciation in the same year they purchased the equipment or property. In other words, you could deduct the full price of the purchase instead of writing off a portion each year. However, unless Congress extends this provision, it will slowly go away. In 2023, the bonus depreciation decreases to 80% and drops an additional 20% each following year.
New 1099-K form deferred
Per the American Rescue Plan Act of 2021, small business owners and freelancers who receive more than $600 from third-party digital platforms — e.g., eBay, Etsy, Facebook Marketplace, etc. — were to report this income via Form 1099-K starting in the 2022 tax year. However, taxpayers and business owners pushed back on these changes, so it was postponed for a year. If this type of income applies to your business, you should expect to receive a Form 1099-K in 2024 for the 2023 tax year.
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) has been extended through the end of 2025. The WOTC is a federal tax credit available to employers who hire individuals from targeted groups that consistently face employment barriers — e.g., veterans, ex-felons, and individuals who receive government assistance. The credit amount can range from $1,200 to $9,600 per qualified employee, depending on the individual hired and the number of hours worked. In addition to employing target groups, the WOTC can help you offset onboarding and training costs for new employees.
Modification with the qualified business income deduction (QBI)
The qualified business income deduction (QBI) is a tax deduction that allows self-employed individuals and small business owners who meet certain criteria to deduct up to 20% of their qualified business income on their tax returns. In 2022, the total taxable income must have been under $170,050 for single filers or $340,100 for joint filers to qualify. However, in 2023, the limits for qualification have increased to $182,100 for single filers and $364,200 for joint filers.
Section 179 increased deduction limit
The Section 179 tax deduction allows you to deduct the full amount of qualifying equipment — e.g., computers, machinery, vehicles, etc. — in the year you purchased it rather than depreciating the cost over time. In 2023, the deduction was increased from $1,080,000 to $1,160,000 of the first $2,890,000 of eligible equipment placed in service during the current tax year. Section 179 has also expanded to include improvements to nonresidential property, such as security systems, HVAC systems, fire protection, and roofs.
Modified credit for retirement plan startup costs
If your business has 50 or fewer employees, the Section 45E tax credit allows you to claim a credit for 100% of the cost to start a retirement plan, up to $5,000. The credit for employer contributions is capped at $1,000 per employee. Ultimately, this credit can alleviate the costs of establishing a retirement plan for your employees.
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If your business has 51 to 100 employees, the Section 45E credit — which previously covered 50% of retirement plan startup costs — completely phases out.
Green, energy-efficient deductions
Signed into law in 2022, The Inflation Reduction Act provides many tax credits and business deductions. For example, this act increased the size of the Energy-Efficient Commercial Buildings Deduction, allowing you to claim a larger deduction per square foot of renovations if your projects qualify. Additionally, you can claim a tax credit in 2023 of up to $7,000 if you buy electric or fuel cell electric vehicles for your business. The credit can go up to $40,000 for vehicles larger than 14,000 pounds.
Interest expense limitation rule
The interest expense limitation rule states that the amount deductible business interest expense in a tax year can’t exceed the total of:
- Your business interest income for the tax year
- 30% of your adjusted taxable income (ATI) for the tax year
- Your floor plan financing interest expense
This rule was temporarily suspended due to the pandemic but is now active for 2023 and beyond.
Increased standard mileage rate
The standard mileage rate is a simple way to calculate the deduction for vehicle use for your small business. For 2023, the standard mileage rate increased to 65.5 cents per mile — a three-cent increase from 2022.
Be prepared for a more robust IRS
The Inflation Reduction Act includes approximately $80 billion in funding for the IRS over the next decade. Roughly $45.6 billion of this funding will be put toward costs for tax enforcement services, including hiring more employees. While this boost in employment may help the IRS provide better customer service and faster processing times, it might also lead to a slight increase in audits for small businesses.
Investing in full-service accounting software is one of the best ways to help defend your small business against an audit. Many services provide several beneficial features, including easy bill management, a receipt and expense tracker, inventory tracking, invoice software, and tax deduction calculation. With the right accounting software, you can make small business tax planning a seamless experience.
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