The Impact of the New Tax Laws on Small Business Owners
By: Lindsey Flake
Keeping up with tax obligations can feel like a full-time demand for small business owners. Tax law is updated each year and in 2023 the rules may be especially confusing, as many of the relief programs implemented during the pandemic are expiring.
It can be confusing and challenging to stay up to date with your tax obligations. We recommend utilizing the services of Squire’s certified public accountants, thus ensuring compliance with current tax requirements.
Just to give you an idea of what’s is changing this year, here is a look at some of the modifications to the tax code:
Net operating rules
Generally, a business can carry forward a financial loss to offset earnings in a future period. (up to 80% of taxable income). However, losses occurring in 2018, 2019, and 2020 were not subject to the 80% limit. Any losses incurred after 2020 are subject to the 80% limit once again.
Interest expense limitation rule
The business interest expense limitation rule was restored in 2022 after being briefly suspended in 2020. Deductible business interest expense is limited to the sum of business interest income, 30% of adjusted taxable income, and floor plan financing interest expense. Disallowed business interest expense is carried forward to the following year.
Increased limits for charitable contributions
The rule that allowed C-Corporations and individual taxpayers to deduct a greater percentage of their income for charitable contributions has expired for the 2023 tax year.
Another deferral for 1099-K recipients
Freelancers and small businesses who utilize the Form 1099-K to report their income (so long as the income is greater than $600 for the year) were required to report this to the IRS. However, after a series of pushback the requirement will not be enforced until the following taxable year. Those to whom this is applicable will receive a Form-1099 K for 2023 in 2024.
Big tax benefits for pass-throughs and corporations
Both the big guys and the little guys received major tax breaks that they will enjoy for the next few years. Small businesses structured as S corporations, LLCs, sole proprietorships, or partnerships, also known broadly as pass-throughs, will get a 20% reduction thanks to the latest tax reform law.
C corporations, have seen their tax rate sliced from 35% to 21%, due to The Tax Cuts and Jobs Act, which was enacted in an attempt to create more wealth and gainful employment in the U.S. economy.
If you are an individual or business owner of a pass-through entity, you should be aware of the SALT (state and local tax) cap. Since 2020, the SALT cap has ruled that filers can deduct up to $10,000 in state and local taxes. If you live in a state considered “high tax,” this will be especially impactful as you file your small business taxes through your personal taxes as well.
These are just a few of the changes to go into effect, if they have not already, for the 2023 tax year. The tax deadline for 2024 is set for April 15, 2024, which will come around much sooner than you think. For S corporations and partnerships, that deadline is one month earlier on March 15, 2024.
Taking care of your small business tax needs should be done year-round. It is highly beneficial to use a professional, such as the award-winning CPAs at Squire. Reach out to a Squire professional today to find out more.