Small business owners need to stay abreast of changes to tax deductions and credits in order to save the most money possible from taking advantage of all available credits and deductions. By keeping tabs on these developments, they can ensure they take full advantage of every deduction available to them and minimize their tax bill significantly.
This year, some of the best business tax deductions are starting to decline – from disappearing entirely, down to those being reduced by up to 80%.
1. Amortization of startup and organizational costs
Before commencing operations, a business may incur what the IRS refers to as “business start-up costs” or “organizational costs.” Generally speaking, these expenses can be claimed as immediate deductions on their tax returns in the year that their operations commence; otherwise they must either amortize or capitalize them over time.
To elect to amortize its expenses, a company must file an election statement within 90 days of starting operation and submit it before its own tax year is over. Once made, this choice cannot be reversed.
Note: it is also essential to realize that if you elect to amortize startup and organizational expenses but never actually start conducting business, these expenses must be capitalized and can have a substantial effect on a company’s income tax liability. Be sure to discuss this matter with your CPA or tax practitioner in advance of when the new tax law takes effect.
2. Bonus depreciation
Under normal circumstances, when businesses purchase personal property that lasts over one year and costs more than one dollar to acquire, their cost must be written off over its useful life. Under TCJA however, small businesses can utilize bonus depreciation or additional first-year deduction to accelerate this writing off process for eligible equipment purchases.
This provision was passed in order to encourage business investment and stimulate the economy, lasting until 2026 when it will gradually phased out.
For full bonus depreciation benefits, property must have been purchased and placed into service after Sept. 27, 2017 for sole business use, without regard to films, television programs or theater performances. Also excluded is qualified film, television or theater property as well as costs incurred with floor-plan financing indebtedness agreements. Also keep in mind this tax break stands apart from Section 179 expensing which allows business owners to write off up to $500,000 of qualifying expenses on one tax return.
3. Energy-efficient commercial buildings
Australia is notorious for having ever-evolving tax laws. From asset write-offs to amnesties, their complex system may leave small businesses feeling disoriented.
But while it is essential to optimize your tax position, decisions based solely on financial benefits should never be the basis for making decisions. Making incorrect tax moves could end up costing your business more than necessary.
For instance, if your business operates as a pass-through entity and resides in a high tax state, 2023 could see you lose out on State and Local Tax (SALT) deduction. With its cap being reduced from $15k for single filers and $20k for couples filing jointly – that can potentially cause serious cash flow issues for some small businesses. In addition, beginning in 2023 accelerated depreciation will only apply towards 10% of qualifying solar system costs for commercial applications.
4. Transportation fringe benefits
If you commute using a car, van, or truck for work purposes, commuter benefits programs could offer tax benefits that will reduce employee income taxes. Employers offer these fringe benefits through employers reimbursing employees for costs related to transit, vanpooling and parking expenses in exchange for reduced employee taxes.
Commuter benefits may come in the form of pre-paid transportation passes for subway, bus, light rail, ferry, jitneys or other means, vouchers or debit cards to purchase transit passes or cash reimbursement for eligible commuter expenses. Unlike bonuses that count towards employee taxable wages and are subject to payroll or social security taxes.
Many deductions, credits and exemptions are annually adjusted for inflation and cost of living changes; however, under new rules several popular small business deductions – including “bonus” depreciation – have been reduced significantly. If you have questions regarding their impact, reach out to one of KraftCPAs advisors for advice.