New Tax Law Changes to Keep a Lookout for 2023
Are you looking for ways to minimize your tax burden going into the next year? If so, understanding the new tax law changes that go into effect as of January 1, 2023, will be vital to help you start the new year off right.
Special depreciation, the R&D credit, energy efficiency credits, business interest expense, meals deduction, and income tax changes are all areas of the tax code that saw adjustments.
Changes were made to special depreciation options for small businesses. The Section 179 limit moves up to $1,160,000 for the tax year 2023. Many small businesses won’t need to worry about reaching those limits, but certain businesses in the construction and manufacturing industries that purchase high levels of equipment need to keep the threshold limits in mind.
Additionally, bonus depreciation is set to begin phasing out in 2023. Bonus depreciation went into effect with the Tax Cuts and Jobs Act of 2017 and is set to completely phase out by 2026 unless extended. The current phase-out amount for 2023 is $2,890,000.
Moreover, the maximum special depreciation deduction for SUVs over 6,000 pounds is set at $28,900. This includes a combination of S179 and bonus depreciation. State agencies may further limit this deduction depending on where your business files.
Another major change that is set to go into effect is the amortization of research and development expenses, known as R&D. Under current rules, R&D expenses are allowed to be immediately deducted in the year they incur. Legislation going into effect for the 2023 tax year will require businesses to amortize these costs over a 5-year period. The tax implications of this can be significant with many small businesses expecting to pay more in taxes due to the disallowance of immediate deducting.
Let’s say your business has $300,000 of qualifying R&D expenses. In the year you claim those expenses for a credit, $270,000 will need to be removed from expenses, increasing income. Only 10% is deductible in the year the credit is claimed. Then, in the following year, your business will be able to reduce taxable income by $60,000, which is 20% of the costs from the claiming year. This will be the case for the next 4 years with the final year reducing income by another 10% or $30,000.
In addition, the documentation needed to substantiate credit claims significantly expands. This includes outlining each business component that claims the credit, the individuals who performed the activities, the purpose of the research, and wage expenses by the employee. The reporting requirements may lead to the need to enlist an accountant to help prepare the credit. Implementing bookkeeping best practices can help you properly track expenses associated with the R&D credit.
The IRS recognizes efforts to promote a greener society. As a result, the Inflation Reduction Act of 2022 passed a number of credits and deductions for businesses that make efforts to move towards energy-efficient equipment. Businesses that install or update energy-efficient infrastructure can claim up to $1.80 per square foot in credits. One of the stipulations for claiming this credit is that the energy and power usage must decrease by 50%.
Furthermore, there is a new credit available for businesses that place clean vehicles in service. Clean vehicles that weigh under 14,000 pounds can claim a credit of up to $7,500 while vehicles over 14,000 pounds are eligible for a credit of up to $40,000. Pair this credit with special depreciation options and you have the potential for significant tax savings.
The clean vehicle credit applies to both new and used vehicles. New vehicles can claim a credit of 15% of the basis in the vehicle or 30% if the car is purely electric, up to the aforementioned limits. Previously owned vehicles can claim a credit of the lesser of 30% of the sales price or $4,000. This gives business owners an incentive to upgrade company vehicles or expand their benefits by offering company-provided transportation.
Business Interest Expense
Section 163j, known as the Business Interest Expense Deduction Limitation, is also seeing changes. Prior to the start of 2022, business interest was limited to 30% of EBITDA, which is the sum of net income, interest, taxes, depreciation, and amortization. However, going forward, the business interest expense is limited to 30% of EBIT, which excludes depreciation and amortization. This presents a risk to taxpayers who rely on adding back depreciation and amortization to take high-interest expense deductions.
For tax years 2021 and 2022, the Taxpayer Certainty and Disaster Relief Act of 2020 increased the deductibility of business meals from 50% to 100%. However, for tax years beginning in 2023, the deductibility is set to revert back down to 50%. This may result in an increase in taxable income, depending on the number of business meals claimed.
Many small businesses pass income down to their personal returns, making it important to consider certain changes. The top tax bracket is expected to revert back to 39.6% from 37%. Businesses that pass significant taxable income to the personal return can expect a larger tax bill. Like always, the standard deduction and the other tax brackets were adjusted to account for inflation. Although these changes may seem immaterial, they can have a large impact on the way your business income is taxed on your individual return.
To avoid being on the IRS crime list, keep these changes in mind going into 2023. Taking new credits and deductions relies on having proper accounting controls in your business. For example, without proper documentation, the IRS may nix your R&D credit claim. This can be detrimental if you are relying on receiving that tax break.
Minimizing your risk of inaccurate filings and lowering your tax liability can be done by working with an accounting expert like, Bookkeepme. The team at Bookkeepme has been helping small business owners for years understand what tax breaks are available. For more information or to schedule a consultation, reach out to a team member today.