How the New Tax Bill Affects Small Businesses
Running a small business can be complicated, especially where taxes are concerned. There are many federal and state rules to keep track of, and the laws surrounding these taxes are always changing. So, how does the new tax bill affect small businesses?
It ends many pandemic-era provisions, and it has adjustments to the SECURE Act, the 1099-K form, and net operating losses deductions, as well as excess business-loss limitation, interest expense limitations, and charitable contribution rules.
As you read about these changes, remember that this article isn’t comprehensive, nor does it offer legal advice. It’s meant as a guide to help make you aware of the changes that could be affecting your small business—always ask a business lawyer to help you ensure your business is compliant.
Tax Law Changes for Small Businesses
Here are some of the key points to keep in mind as you prepare for 2023:
1. SECURE Act
Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, employers with 50 or fewer employees who provide retirement plans will receive a tax credit of up to $5,000 per year for five years. In 2023, this credit will double to a maximum of $10,000, with a maximum of $1,000 per employee.
2. Net Operating Losses
This deduction can help small businesses reduce their taxable income and avoid paying taxes during times of financial hardship or slow-growth phases. For net operating losses generated in 2018, 2019, or 2020, the amount that a taxpayer can carry forward to offset future taxable income is increased from 80% to 100%. For those losses generated after 2020, the carry-forward limit remains at 80% of your taxable income.
3. Excess Business-Loss Limitation Rules
The temporary suspension of the Tax Cuts and Jobs Act has ended, which means that beginning in 2023, businesses may be subject to excess business-loss limitation rules. Under these rules, if the total net losses for a business exceed $270,000 for single filers or $540,000 for joint filers, the taxpayers cannot deduct those losses. However, you can carry losses that exceed these amounts forward to future years.
4. Interest Expense Limitation Rule
This rule was previously suspended but is now reinstated, which means that businesses will be limited to deducting up to 30% of their adjusted taxable income when deducting their interest expenses.
5. 1099-K Form Delayed
The implementation of the American Rescue Plan Act of 2021, which states that third-party digital platforms must provide small business owners and freelancers who earn over $600 a year with a 1099-K form has been delayed until 2023. Under this Act, those third-party platforms will also have to report the income on the 1099-K forms to the IRS.
6. Charitable Contribution Rule Expired
The temporary increase in the limits of charitable contribution deductions has expired, and taxpayers can only deduct up to 60% of their adjusted gross income for charitable donations.
These are just a few of the key changes in the new tax bill that small business owners need to be aware of in 2023. It’s important to stay on top of these rules and regulations so you can plan appropriately and make sure your company remains compliant with all federal and state tax laws.
And remember, none of the information in this article should be considered comprehensive information or legal advice, so consult your own business lawyer as far as how to proceed in obeying these laws.
The Different Types of Small Businesses
Small businesses come in all shapes and sizes, from sole proprietorships to LLCs. Here’s a quick rundown of the different types of small business structures and their tax implications:
Sole Proprietorship
This is the simplest type of business structure, where one person owns and operates the business without any formal documentation or filing with the government. All profits are reported on that individual’s personal tax return, while losses can be deducted from other income sources.
Partnership
A partnership is when two or more people own and operate a business together. Each partner reports their share of the profits and losses on their personal tax return, while the business itself does not pay any taxes.
LLC (Limited Liability Company)
An LLC combines aspects of both partnerships and corporations by protecting owners from personal liability for debts incurred by the company. Owners are also able to take advantage of pass-through taxation, meaning they report profits on their individual tax returns.
S Corporation (S-Corp)
S-corporations are similar to LLCs in that owners are afforded some protection from personal liability, but they also enjoy many of the tax benefits of corporations. Owners must file an election with the IRS to be treated as an S-corp for tax purposes, and profits and losses are reported on the shareholder’s individual return.
C Corporation (C-Corp)
C-corps offer the most flexibility when it comes to taxation—profits can be passed through or taxed at the corporate level—making them a popular choice for larger businesses. Profits are reported on the company’s corporate return, while shareholders pay taxes on dividends received from their investment in the business.
No matter what type of small business structure you choose, being familiar with the changes in the tax code can help ensure that your business remains compliant and helps you plan more effectively for the future.
It’s always a good idea to consult with an accountant or other financial professional to make sure you understand all of the potential implications of any new regulations. This way, you can make sure that your company is taking advantage of all available deductions and credits so that it can maximize its profits.
Common Small Business Tax Deductions
Tax deductions for small businesses can help reduce your taxable income and lower your overall tax bill. There are many deductions that are available to small business owners, so look into which ones you may qualify for.
Common deductions include:
– Business Expenses
You may be able to deduct ordinary and necessary expenses incurred while conducting business activities, such as office supplies or travel expenses.
– Home Office
If you work from home, you may be eligible for a deduction on the portion of your residence used exclusively for business purposes.
– Employee Benefits
Certain types of employee benefits may also be deductible if they’re used to attract or retain qualified employees. Examples include health insurance premiums and retirement contributions.
– Vehicle Expenses
If you use your vehicle for business purposes, you may be able to deduct a portion of the costs associated with maintaining it.
– Interest Payments
If your small business takes out a loan or has credit card debt, you may qualify for a deduction on the interest payments related to that debt.
– Charitable Contributions
If you make any donations to charity, those contributions may be deductible as well.
In addition to these common deductions, there are also other tax credits and incentives available that can further help lower your tax bill. Be sure to consult with an experienced accountant or tax lawyer so that you don’t miss out on any savings opportunities.
Related Questions
What is considered a small business?
The definition of a small business is different depending on which government agency you are referring to. Generally, the Small Business Administration (SBA) defines a small business as any company with fewer than 500 employees. While other agencies have their own definitions. Make sure to check with the appropriate agency when trying to determine if your business qualifies as a small business for certain tax law restrictions or benefits.
What does a business lawyer do?
Business lawyers provide legal advice and services to companies and can help you—a small business owner—navigate the complexities of state and federal business and tax laws. They also handle contracts, mergers, acquisitions, litigation, and intellectual property disputes.
When do I have to file my taxes as a small business owner?
Generally, small business owners are required to file taxes annually and make quarterly estimated tax payments. It’s important to stay on top of your filing deadlines, as failure to do so may result in hefty penalties. Additionally, certain entities—like partnerships and S-corps—have different filing requirements than other types of businesses. Make sure you are aware of the filing requirements for your business to ensure you are compliant.
