The tax law is continually changing, with new rules coming into effect and old ones expiring. Sure, you can wait until you meet with your CPA or other tax adviser later in the year, but why wait to learn what’s new? The sooner you learn about the changes, the sooner you can take advantage of them and adapt business policies where needed. This year presents an array of changes that may affect decision making now for your business. The following is not a complete list, but some of the more common changes you could encounter.
Some new tax rule changes
Business meals and travel
The 100% deduction for the cost of business meals in 2022 does not apply in 2023. Instead, there’s a 50% limit. This limit must be taken into account whether you deduct actual costs or use a standard rate set by the GSA or the IRS.
The IRS standard mileage rate for business use of a vehicle in 2023 is 65.5¢ per mile. This limit needs to be factored into accountable plans that reimburse employees for business driving of their personal vehicles.
Bonus depreciation for the cost of buying eligible property is 80% in 2023, down from 100% in 2022. The types of eligible property have not changed. See IRS Publication 463 for details about bonus depreciation, keeping in mind that the rate is only 80% this year.
The dollar limit on an immediate deduction for buying business equipment—expensing, which is the Section 179 deduction—has been increased for 2023. It’s $1,160,000 (up from $1,080,000 in 2022).
If you install a charging station at your business this year so that you can recharge an electric vehicle, you may qualify for the alternative fuel refueling property tax credit. The maximum credit in 2023 is limited to 30% of the cost or 6% in the case of property subject to depreciation, not to exceed $100,000. Permitting and inspection fees are not included in covered expenses. But the credit may only be claimed by a business located in a low-income or rural area.
Compensation and employee benefits
Various dollar limits and rules relating to paying employees have been changed for 2023 to reflect cost-of-living adjustments and new laws. These changes affect income and employment taxes for a business.
Social Security tax. There’s a new wage base for figuring the Social Security tax of FICA and self-employment tax: $160,200 (up from $147,000 in 2022).
Fringe benefits. The dollar limits on various tax-free employee fringe benefits have been adjusted for inflation as follows:
- Adoption assistance: $15,950
- Health savings account contributions:
- Transportation fringe benefits (not deductible by the employer even though tax free to employees): $300 per month
The dollar limit on contributions to health FSAs is $3,050, with a maximum carryover to 2024 of $610.
QSEHRAs. Reimbursements from a qualified small employer health reimbursement arrangement (QSEHRA) for individually-obtained coverage increased in 2023 to $5,850 for individual coverage and $11,800 for family coverage.
Qualified retirement plans. Contribution and benefit limits are higher for various qualified retirement plans:
- Defined benefit plans: $265,000
- Profit-sharing and SEP plans: $66,000
- 401(k) salary referrals: $22,500, plus a catch-up contribution limit for those age 50 and older by the end of 2023 of $7,500
- SIMPLE-IRA salary deferral: $15,500, plus a catch-up contribution limit for those age 50 and older by the end of 2023 of $3,500
There are some new retirement rules for 2023:
- The credit for small employer pension plan startup costs is increased from 50% to 100% this year for employers with up to 50 employees. The amount of the additional credit generally is a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. This full additional credit is limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees.
- A new credit of up to $500 for up to 3 years for small employers that enroll military spouses in a retirement plan.
- SIMPLE and SEP plans can offer Roth accounts.
- The age for required minimum distributions (RMDs) for employees and self-employed individuals who attain age 72 after 2022 is 73 (up from 72).
- Small incentives to induce employees to make elective deferrals are permissible.
- The employee plans compliance resolution system has been expanded.
- Distributions for birth or adoption may be repaid, but there’s a 3-year limit for this.
- Employers may rely on an employee certifying that deemed hardship conditions are met.
- Certain notices don’t have to be sent to employees who opt not to participate in a company plan; the annual notice of eligibility to participate is still required.
The gross income test used for determining eligibility to use of the cash method of accounting is $29 million in average annual gross receipts for the 3 prior years (up from $27 million in 2022. The gross income test is also used to determine whether inventory accounting is needed.
The threshold for excess business losses by noncorporate taxpayers is increased to $578,000 for joint filers and $289,000 for other filers. Owners of pass-through entities with losses in excess of their threshold amount treat the excess as part of a net operating loss.
New rules applied to the deduction for energy-efficient commercial buildings, with a maximum deduction of $5 per square foot. To qualify for a deduction, property must be installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 25% beginning or more, in comparison to a reference building that meets the minimum requirements of the applicable reference standard using certain methods of calculation.
The taxable income limit at which the qualified business income (QBI) deduction—a personal deduction based on income for owners of pass-through entities—begins to phase out has increased to $364,200 for joint filers and $182,100 for other filers.
Review these changes with your CPA or other tax professional so you can adapt your business practices accordingly. For example, be sure to update your accountable plan to reflect the 2023 mileage rate for reimbursement to employees.