For many small business owners, the new year signals the start of tax season preparation. The filing deadline for tax year 2022 is Tuesday, April 18, 2023, 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.
2022 tax year: Last chance for deductions and credits
Several deductions and credits expire or are changing in 2022. Take advantage of these now and consider how these changes could affect your income and corporate tax rate in 2023. Pay attention to the latest IRS guidance in each case, as it may change before you file your taxes.
Credits and deductions that expire in 2022 include:
- Section 179: To support small to medium-sized businesses, Section 179 incentivizes operational improvements and helps cut overhead costs. As in 2021, you can purchase certain fixed assets and take the entire Section 179 depreciation deduction in 2022, referred to as first-year expensing. This is the final year businesses can deduct 100% of qualified expenses. In 2023, this figure is reduced to 80%, as the 100% allowance generally decreases by 20% per year in taxable years after 2022 until January 1, 2027.
- Expanded Child and Dependent Care Tax Credit (CDCTC): The CDCTC, which supports working parents and caregivers, dropped from an $8,000 maximum in 2021 to $2,100 in 2022. Although the maximum amount of benefits is expected to stay the same in 2023, working parents who have previously claimed CDCTC will likely notice a drop in benefits since the income thresholds and percentage of child care expenses deductible have dropped.
- Qualifying business meals: The business meals tax credit was instituted during the COVID-19 pandemic to encourage the support of restaurants. Indirectly, the tax credit also helps employers go the extra mile with their employees by making it easier to provide catered meals. Although the government could choose to extend this credit, take advantage of these deductions before the current January 1, 2023 deadline in case it does not get extended.
- Publication 936: In 2023, mortgage insurance premiums will no longer be treated as deductible mortgage interest. This may be a concern for businesses with property or brick-and-mortar locations. You can familiarize yourself with Publication 936 here.
- 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).
[Read more: 10 Commonly Overlooked Small Business Tax Credits]
In 2023, mortgage insurance premiums will no longer be treated as deductible mortgage interest. This may be a concern for businesses with property or brick-and-mortar locations.
2023 tax year: Leverage tax inflation adjustments
Although there are no major pieces of legislation that will affect the 2023 tax year, the tax inflation adjustments are greatly impacting tax brackets. Tax benefits may be in store for taxpayers whose salaries have not been increased to accommodate inflation. While the Inflation Reduction Act of 2022 will most benefit large corporations, smaller companies may also experience some relief. Energy-efficient commercial buildings can also receive energy-related tax breaks.
Companies that work through LLCs or S corporations qualify for the Section 199A deduction for qualified business income (QBI) and will be able to deduct 20% of their business income. QBI deduction limits will increase to $182,100 for individuals and $364,200 for couples who file together. Even if your business doesn’t already fall within those bounds, you may be able to plan your year in order to do so and earn a higher deduction.
Small businesses that work internationally may benefit from the increase in foreign-earned income exclusion — $120,000 as compared to $112,000 in 2022.
One of the most common tax deductions, the standard deduction, will be increasing by $900 to $13,850 for single filers while couples who file jointly will have a standard deduction of $27,700.
Retirement and health savings account plans are set to increase their contribution limits. The limitation for salary contributions to health spending arrangements will increase to $3,050. If you and your business have excess funds despite inflation, you can set them aside to plan for the future.
If any of these circumstances apply to your business, make a note to discuss them with your CPA or tax preparer so you can maximize your deductions and savings for your 2022 tax filings.
[Read more: 5 Smart Small Business Tax Strategies That Will Save You Money]
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