For many small business owners, the new year signals the start of tax season preparation. The filing deadline for tax year 2023 is Monday, April 15, 2024, which means now is the time to start organizing your financial statements and looking for ways to reduce your annual tax bill.
In addition to planning for typical business tax deductions like payroll expenses, advertising costs, and charitable contributions, business owners will want to read up on some of the tax changes on the docket for this year. For instance, many of the tax credit programs implemented during the COVID-19 pandemic are winding down, but there are also some new opportunities to take advantage of increased deduction limits.
Here's a brief overview of what small business owners should know about planning for the upcoming tax season.
2023 tax year: Take advantage of these deductions and credits
Your business may be eligible for several tax deductions and credits. However, many of these longstanding tax breaks are slated to change for the 2023 tax year. Pay attention to the latest IRS guidance in each case, as it may change before you file your taxes.
Credits and deductions for small businesses in 2023 include:
- Section 179: To support small- to medium-sized businesses, Section 179 incentivizes operational improvements and helps cut overhead costs. In 2021, you could purchase certain fixed assets and take the entire Section 179 depreciation deduction in 2022, referred to as first-year expensing. However, 2022 was the final year businesses could deduct 100% of qualified expenses, as the 100% allowance began its decrease by 20% per year in taxable years after 2022 until January 1, 2027. This means that for tax year 2023, the maximum deduction is 80%; in tax year 2024, this will drop to 60%, and so on.
- Expanded Child and Dependent Care Tax Credit (CDCTC): The CDCTC allows working parents and caregivers to claim between 20% and 35% of care expenses; the $2,100 maximum in 2022 increased to a $3,000 maximum per person ($6,000 for two or more people) in 2023. There is currently no income limit to claim the CDCTC.
- Qualifying business meals and entertainment: The business meals tax credit was adjusted during the COVID-19 pandemic to encourage the support of restaurants, allowing businesses to temporarily deduct 100% of business meal expenses in the 2021 and 2022 tax years. For 2023, deductions have reverted to their pre-2021 state: Most business meals, including those provided during in-office meetings, conferences, and business travel, are now 50% deductible. Certain meals, including food for recreational employee events and customers or the general public, are 100% deductible. Entertainment expenses of all kinds are no longer deductible.
- Mortgage interest tax deduction: In 2023, mortgage insurance premiums are no longer treated as deductible mortgage interest. This may be a concern for businesses with property or brick-and-mortar locations. Publication 936 provides further guidance on the rules for deducting mortgage interest.
- Railroad Maintenance Credit: The 50% credit rate for the railroad track maintenance credit will be reduced to 40% beginning in 2023. The railroad track maintenance credit had been a long-standing tax extender that was made permanent in the Consolidated Appropriations Act, 2021 (P.L. 116-260).
The following tax credits are still in place for the 2023 tax year but are expected to expire in 2025:
- New Markets Tax Credit (NMTC). The NMTC Program incentivizes private entities to invest in economically disadvantaged and distressed communities. This credit is currently slated to expire at the end of 2025, though bipartisan legislation has been proposed to make the NMTC permanent.
- Employer credit for paid family and medical leave. This credit, originally initiated in the 2017 tax revision and previously extended through 2020, was once again extended through 2025. It can currently be claimed for all wages paid between the tax years 2018 and 2025.
- Work Opportunity Tax Credit (WOTC). The WOTC is available to employers that hire workers from targeted groups facing barriers to employment, including veterans, the previously incarcerated, and long-term recipients of family assistance or unemployment.
[Read more: 9 Commonly Overlooked Small Business Tax Credits]
Most business meals, including those provided during in-office meetings, conferences, and business travel, are now 50% deductible.
How tax inflation adjustments will impact taxes in 2023 and beyond
The IRS’s annual inflation adjustments for tax year 2023 will impact several tax provisions. For one, the standard deduction — one of the most common deductions — has increased to $13,850 for single taxpayers and $27,700 for married couples filing jointly.
Depending on your company’s structure and where you conduct business, you may benefit from these adjusted tax provisions:
- Effective tax year 2023, the Inflation Reduction Act extended select energy-related tax breaks and adjusted the tax deduction for energy-efficient commercial buildings. In November 2023, the IRS and the U.S. Department of the Treasury released proposed regulations expanding the range of eligible energy properties.
- Companies that work through LLCs or S corporations qualify for the Section 199A deduction for qualified business income (QBI) and can deduct 20% of their business income. QBI deduction limits have also increased to $182,100 for individuals and $364,200 for couples filing jointly.
- Small businesses that work internationally may benefit from the increase in foreign-earned income exclusion — $120,000 in tax year 2023 as compared to $112,000 in 2022.
- Retirement and health savings account plans have increased their contribution limits for the 2023 tax year. The limitation for salary contributions to health-related flexible spending arrangements increased to $3,050, while employee contribution limits for 401(k) plans increased to $22,500. If you and your business have excess funds despite inflation, you can set them aside to plan for the future.
- If your business gives gifts, note the annual exclusion has increased to $17,000 for the 2023 calendar year — an increase from $16,000 in the previous calendar year.
If any of these circumstances apply to your business, make a note to discuss them with your certified public accountant or tax preparer so you can maximize your deductions and savings for your 2023 tax filings.
[Read more: How Do Charitable Donations Impact Your Taxes?]
Planned changes for tax year 2024
In November 2023, the IRS announced several inflation-related adjustments for the 2024 tax year, including changes to income tax brackets and standard deductions.
The income threshold for each bracket — which shows how much a taxpayer owes on each portion of their taxable income — has risen, with the top rate of 37% applying to single filers with a taxable income over $609,350 ($731,200 for married couples filing jointly). The standard deduction for tax year 2024 will increase to $14,600 for single filers ($29,200 for married couples filing jointly).
Keep in mind these changes don’t go into effect until tax year 2024, meaning they will impact returns filed in 2025. However, it’s always a good idea to stay up to date on anticipated tax changes so you and your business can plan accordingly.
[Read more: 10 Smart Small Business Tax Strategies That Will Save You Money]
This story was originally written by Rachel Barton.
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