CEO/Founder The Concierge CPA Consulting, and TaxPlanIQ, a SaaS Tax Planning Software for Accountants.
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The year 2023 didn’t shake the table much for individual taxpayers, but it brought some noteworthy adjustments for the business sphere. Let’s break down these changes in a way that’s easy to digest by considering their impact on a small bakery.
What’s New For Business Taxes?
1. Retirement Plan Incentives
The government is making it lucrative, via the SECURE Act 2.0, to set up and fund a new retirement plan for businesses with fewer than 100 employees. Eligible plans include 401(k)s, simplified employee pension plans and SIMPLE IRA plans. Imagine you’ve just opened a small bakery and you want to help your handful of employees save for their retirement. In 2023, this gift got a bit bigger with three credits.
• Startup Tax Credit (Plan Cost Credit)
This is open to small employers with 100 or fewer employees who establish a new qualified retirement plan, SEP or SIMPLE IRA plan. For businesses with up to 50 employees, the credit equals 100% of the administrative and retirement-education expenses for the plan, up to $5,000 per year for the initial three years of the plan. (Businesses with 51-100 employees could receive 50% of startup costs.)
So, for example, if you set up a new 401(k) plan for your bakery employees and incurred $4,000 in administrative and retirement-education expenses in the first year, you would be eligible for a $4,000 tax credit for that year.
• Employer Contribution Tax Credit
This credit is available to small employers with 100 or fewer employees making contributions to employee retirement plans. These employers could receive a credit of up to $1,000 per employee for the first two years, provided the employer makes a matching or non-elective contribution.
If you have five employees and contribute $1,000 to each employee’s retirement account, you’re eligible for a tax credit of $5,000 for that year.
• Automatic Enrollment Tax Credit
Any employer that adds an automatic enrollment feature to their existing plan or includes it in a new plan is eligible for a flat credit of $500 per year for a maximum of three years.
2. Net Operating Loss Rules
This is a slight adjustment from previous years, where the limitation wasn’t as restrictive. To illustrate how this works, let’s say in one year your bakery didn’t sell enough cakes and you spent more money than you made. This is called a net operating loss. You can use this loss to reduce your taxable income in the following years; however, now you can only use it to cover up to 80% of your income in the following years, ensuring you still pay some tax.
For example, if your loss in one year was $10,000 and your income the next year was $15,000, you could reduce the income for the second year by 80% of $10,000, which would be $8,000.
3. Interest Expense Limitation
The limit on interest expense deductions has been fine-tuned in 2023 to align with the income generation, a shift aimed at balanced tax liability. So, if you borrowed money to grow your bakery and now pay interest, the amount of interest you can deduct from your taxable income has some limits. It’s tied to how much money your bakery makes and some other factors, ensuring you still pay some tax.
For example, suppose your interest expense is $5,000, but the limit is set at $4,000 due to income constraints. In that case, you would only be able to deduct $4,000.
4. Standard Mileage Rates
If you drive around to deliver cakes or buy ingredients, you can deduct some costs for every mile you drive. In 2023, you get to deduct 65.5 cents for each mile, a little more than before.
Note: If you use your vehicle for business more than 50% of the time, consider looking into actual expenses or establishing an accountable plan to optimize deductions. Comparing the standard mileage rate with actual expenses, such as fuel maintenance and depreciation, could yield larger deductions.
5. Form 1099-K
If you sell your cakes online and earn more than $600, the online platform will now send you and the taxman a form showing how much you made. So, if you make $700 online via Stripe, you'll receive a Form 1099-K showing $700 from Stripe. It’s a way to keep the records straight.
Be careful to reconcile this with existing receipts, and not add it on top of your sales (double dipping).
6. Corporate Tax Rate Reduction In Some States
If your bakery is in certain states, such as Arkansas or Iowa, the amount of money you need to pay as corporate tax has been reduced. A little less tax, a little more cake!
7. Energy Efficiency Deduction
This deduction, although not new, has been emphasized more in 2023 to encourage eco-friendly business practices. It’s a way to say thank you for caring about the environment, and it adds up quickly.
These adjustments showcase the government’s effort to foster a supportive tax environment for small businesses. If you aren’t pretty clear about what you’ll owe next March (for S-corps) or April, get with a tax advisor or tax strategist to figure it out. Most tax strategies need to be done before December 31 of the existing tax year to apply. And if you owe the IRS, the interest rate increased to 8% (ouch!) October 1.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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