Here’s what small business owners need to know about tax law changes and inflation adjustments for the year ahead.
Standard Mileage Rates
In 2023, the rate for business miles driven is 65.5 cents, up 3 cents from the midyear increase setting the rate for the second half of 2022
Section 179 Expensing
In 2023, the Section 179 expense deduction increases to a maximum deduction of $1,160,000 of the first $2,890,000 of qualifying equipment placed in service during the current tax year. This amount is indexed to inflation for tax years after 2018. The deduction was enhanced under the TCJA to include improvements to nonresidential qualified real property such as roofs, fire protection, alarm systems and security systems, and heating, ventilation, and air-conditioning systems. Also of note is that costs associated with the purchase of any sport utility vehicle, treated as a Section 179 expense, cannot exceed $28,900.
Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and years beyond.
Qualified Business Income Deduction
Eligible taxpayers can deduct up to 20 percent of certain business income from qualified domestic businesses and certain dividends. To qualify for the deduction, business income must not exceed a certain dollar amount. In 2023, these threshold amounts are $182,100 for single and head-of-household filers and $364,200 for married taxpayers filing joint returns.
Research & Development Tax Credit
Starting in 2018, businesses with less than $50 million in gross receipts can use this credit to offset alternative minimum tax. Certain start-up businesses that might not have any income tax liability will be able to offset payroll taxes with the credit as well.
Work Opportunity Tax Credit (WOTC)
Extended through 2025 (The Consolidated Appropriations Act, 2022), the Work Opportunity Tax Credit is available for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.
Employee Health Insurance Expenses
For taxable years beginning in 2023, the dollar amount of average wages is $30,700 ($28,700 in 2022). This amount is used for limiting the small employer health insurance credit and determining who is an eligible small employer for the credit.
Business Meals and Entertainment Expenses
Taxpayers who incur food and beverage expenses associated with operating a trade or business can deduct 100 percent (50 percent for tax years 2018-2020) of these expenses for tax years 2022 and 2023 (The Consolidated Appropriations Act, 2022) as long as the meal is provided by a restaurant.
Employer-provided Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees in 2023, the maximum monthly limitation for transportation in a commuter highway vehicle, as well as any transit pass, is $300. The monthly limitation for qualified parking is $300.
While this checklist outlines important tax changes for 2023, additional changes in tax law are likely to arise during the year ahead. Do not hesitate to contact the office if you have any questions or want a head start on tax planning for your small business in the year ahead.