Important 2023 Tax Changes That Small Business Owners Should Know

Tax season is upon us again, so now is the time to start preparing your business taxes. Make sure you have the information you need to file accurately and on time so you can avoid penalties and interest.

Tax Inflation Adjustments

If you are a small business owner, there are a few important 2023 tax changes that you should know about. These include tax inflation adjustments and a new limitation on business losses. The IRS typically adjusts income thresholds, deduction amounts, and credit values each year to reflect inflation. This helps prevent what’s called bracket creep, which occurs as people move into higher income tax brackets or have reduced value from their credits and deductions due to higher prices.

Tax Credits For Energy-Efficient Commercial Buildings

One of the most important 2023 tax changes that small business owners should be aware of is the expansion of the 179D deduction. The new legislation allows the deduction to be claimed for all qualified commercial buildings. The deduction may be up to $5 per square foot for buildings that meet prevailing wage and apprenticeship requirements, depending on the building’s energy efficiency level. It is also available for designers working on schools, hospitals, churches, and facilities owned by the government. Other changes include the 45L Residential Credit, which has a base credit of $500 per unit, increasing to $2,500 if the property meets prevailing wage requirements or is Zero Energy Ready. The credit is also extended to fuel cell and biomass systems, which qualify for a 30% tax credit for the cost of installing them.

Tax Credits For Electric Vehicles

Previously, you could get a tax credit of up to $7,500 for the purchase or lease of an eligible electric vehicle. But a key part of the Inflation Reduction Act changed the rules for this credit and the credit is now in limbo until the Treasury Department issues its new guidelines in March 2023. Until that time, the credit is worth between $3,751 and $7,500 depending on battery size, income requirements and other conditions. In addition, the battery and critical mineral components of the vehicle must be made or assembled in North America.

Tax Deductions For Pass-Through Businesses

As a small business owner, you can deduct various expenses related to your business. These include rent, supplies, travel, and business-related subscriptions. The Tax Cuts and Jobs Act (TCJA) introduced a 20% deduction for pass-through businesses that are structured as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships. The amount of this deduction depends on how much of your QBI exceeds a certain threshold, which is adjusted for inflation each year. This 20% deduction is phased out at income levels that exceed $329,800 if married filing jointly, or $164,900 if single. Moreover, a cap is imposed on specified service trade or business (SSTB) deductions.

Tax Deductions For Transportation Fringe Benefits

You may be able to deduct certain expenses related to your business, such as advertising, startup costs and retirement plan costs. However, you should be careful to only claim deductions that are relevant to your business and not those that are used for personal reasons. If you’re an employer, you can deduct your employees’ transportation fringe benefits, such as transit passes and parking. But remember that these aren’t as valuable as other tax deductions. 

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