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Soul singer Marvin Gaye has a line in his hit song, “Troubleman,” that has stood the test of time: “There’s only three things that’s for sure, taxes, death, and trouble.”
While it may seem like a no-brainer that people who own small businesses must pay taxes, the statistics tell a different story. One-third didn’t know whether they needed to pay quarterly-estimated taxes; 25% didn’t know how to pay their taxes; and 30% didn’t know to set aside money to pay taxes, according to an American University study.
From adjustments in pension plan credits to alterations in net operating loss rules, the tax landscape is evolving. As 2023 comes to a close (and tax season looms), here are the key tax changes, deadlines, and planning strategies small business owners need to know.
SECURE Act Boosts Pension Plan Credits
In 2023, small business owners stand to benefit from a significant change brought about by the SECURE Act, which amplifies the pension plan startup costs credit. This adjustment, designed to incentivize businesses to kickstart retirement plans for their employees, allows eligible employers to potentially claim a tax credit of up to $5,000 for three years.
This credit covers the essential costs of initiating retirement plans like SEPs, SIMPLE IRAs, or qualified plans such as 401(k)s. The tax credit operates on a dollar-for-dollar basis, directly reducing the taxes owed. To qualify, businesses must have 100 or fewer employees who received at least $5,000 in compensation in the preceding year, feature at least one non-highly compensated employee as a plan participant, and ensure that employees in the three preceding tax years weren't substantially the same as those in another plan sponsored by the employer.
Net Operating Loss Rules: Limiting Deductions
The rules governing net operating losses (NOLs) were revamped in 2023, placing limitations on deductions. Businesses must be aware of these changes, as they could impact their ability to offset current-year losses against prior or future years' income. Navigating these new rules requires a careful examination of the business's financial standing and strategic tax planning.
Awareness of these revisions is crucial for strategic tax planning, given their potential implications on businesses' financial standing. Notably, the Treasury Department's final regulations issued on July 10, 2023, underscore the impact of the five-year extended NOL carryback period introduced by the CARES Act. This extension allows NOLs generated between December 31, 2017, and January 1, 2021, to be carried back to the five taxable years preceding the relevant tax year.
Business-Loss Limitation Rules: Caps on Losses and Spousal Taxation
In another significant shift, business-loss limitation rules now impose caps on losses, with spousal income taxed separately. This change can affect businesses structured as pass-through entities, altering the way losses are calculated and carried forward. Business owners should reassess their financial strategies to adapt to these revised rules effectively.
Reinstatement of the Interest Expense Limitation Rule
The interest expense limitation rule, reinstated in 2022, is another facet of tax changes affecting businesses. This rule places restrictions on the amount of deductible interest, impacting businesses that rely heavily on debt financing. Careful consideration of financing structures and interest-bearing obligations is crucial to optimizing deductions within the constraints of this rule.
Charitable Contribution Limits and Deferred 1099-K Reporting
Businesses accustomed to contributing to charitable causes must be aware that charitable contribution limits have expired. Additionally, the implementation of the new 1099-K reporting requirements has been deferred to 2024. Businesses should stay attuned to updates and plan their charitable giving accordingly, while also preparing for the upcoming changes in reporting.
Tax Benefits for Pass-throughs and Corporations
Pass-through businesses receive a 20% deduction, with phase-outs at specific income levels, incentivizing the growth of these entities. C corporations, on the other hand, benefit from a reduced corporate tax rate, providing relief for businesses structured under this form. Understanding the nuances of these benefits is crucial for optimizing tax positions.
First-Year Bonus Depreciation: Annual Reductions from 2023
Businesses accustomed to the benefits of first-year bonus depreciation face an annual reduction that started in 2023. This change emphasizes the importance of strategic planning for capital investments, considering the evolving depreciation landscape and its impact on overall tax liability.
Top Small Business Deductions and Types of Small Business Taxes
For small businesses, understanding the top deductions is paramount. Rent, home office expenses, advertising, vehicle costs, and employee salaries are key areas to focus on for maximizing deductions. Furthermore, being aware of the various types of small business taxes, including income tax, self-employment tax, employment taxes, sales and excise tax, and estimated taxes, is crucial for effective financial planning.
Energy-Efficient Renovations: Tapping into Incentives
Thinking of upgrading your business space? Consider energy-efficient renovations. There are multiple tax credits for energy-efficient upgrades, such as the Federal Solar Tax Credit. As you plan renovations, explore how energy-efficient improvements not only contribute to sustainability but also align with tax-saving opportunities.
Conclusion
The tax changes in 2023 bring both challenges and opportunities for businesses. Navigating this landscape requires a comprehensive understanding of the revised rules, strategic planning, and collaboration with tax professionals. By staying informed and adapting to the evolving tax environment, businesses can position themselves for financial success in the year ahead.
Sources
This article was originally published in Certainty News [link to article page]
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