New year means new tax code tweaks

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From new rules on business meals to “green” incentives, tax codes are getting a lot of tweaks in 2023. We spoke with some experts to find out what they are and how business owners can prepare.

Companies that routinely run up a tab on business meals should be aware that only 50% of the “reasonable” costs will be deductible on a federal return in 2023, down from 100% — while “entertainment” costs continue to be non-deductible, noted Mazars Partner Erik Gary. “So, if you bring a client to an event where dinner and a show is presented, it may be worthwhile to try to get a bill that breaks down the entertainment and meal portions,” he said. “Another issue, timing for purchasing fixed assets, may have a wrinkle this year. Generally, if you think business income rates will be rising in 2024 and beyond, it would normally be worth it to consider deferring your purchase – if it also makes sense from operational and cash-flow angles – since the tax break will generally be worth more. But at the same time, so-called bonus depreciation rates are scheduled to drop 20 percentage points each year (to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 before phasing out in 2027), so business owners should consult with their accountant to analyze the mix and see what makes sense.”

And with more people working from home, “the home office deduction is getting more attention,” Gary added. “Taxpayers should be aware that there are two methods — the ‘simplified method’ and the ‘standard method.’ The simplified method is limited to a $1,500 maximum deduction, while the standard method takes a ratio of your home office square footage over the total square footage of your home. Taxpayers should consult with their tax or other adviser to determine the best one in their individual circumstance.”

Finally, business owners and others who are thinking of purchasing an electric vehicle should pay attention to some provisions of the federal Inflation Reduction Act of 2022. “Qualified EVs will still generally be eligible for vehicle tax credits of up to $7,500 – or $40,000 for business vehicles weighing over 14,000 pounds – but for individual use, they will be subject to purchaser income- and MSRP- (manufacturer’s suggested retail price) limits as of Jan. 1, 2023,” he noted. “Vehicles purchased for business use, however, will generally not be subject to those income threshold limits.”

Disappearing bonus

The current, 100% federal bonus depreciation – which generally lets businesses immediately deduct a large percentage of the purchase price of machinery and other eligible assets, instead of writing the cost off against income over the item’s ‘useful life’ – is beginning to wind down, according to EisnerAmper Tax Partner Jordan Amin. “The last year of 100% bonus depreciation was 2022, and it is scheduled to drop by 20% a year beginning with the 2023 tax year,” he noted. “Even during the wind-down, it can still be a significant way to reduce a business’ tax bill, but companies need to pay attention to the timeline and may wish to factor that in as part of their asset-purchase strategies.”

And a Garden State workaround to federal limits on the deductibility state and local taxes, the Pass-Through Business Alternative Income Tax NJ, or NJ BAIT, continues to be attractive, he added. “New Jersey was one of the first states to offer the workaround for the $10,000 cap on SALT deductions instituted by the Tax Cuts and Jobs Act of 2017, and it’s still useful,” Amin explained. “But business owners should review the way their company is structured – sole proprietors and single-member LLCs generally cannot utilize the NJ BAIT election – and companies that have to file in multiple states may be subject to different rules in each state. So, business owners should meet with their CPA or other adviser early on to map out their tax strategy.”

Taxpayers appear to have dodged one bullet – at least temporarily – in 2023, but they should know that a significant change to payment reporting is coming down the pike, according to Betsy Sosa, tax director at the Fairfield office of Aprio LLP. “Business owners need to be aware of some upcoming changes to reporting transactions from third-party settlement organizations like PayPal and Venmo,” she said. “Beginning Jan. 1, 2023, a TPSO must report third-party network transactions paid during the year that exceed $600 in aggregate payments, regardless of the number of transactions. For example, a single transaction for more than $600 will trigger the reporting requirement; as well as, say, 60 transactions for $11 each, to the same payee.”

The American Rescue Plan of 2021 adjusted the reporting threshold for TPSOs, reducing it from the previous trigger of more than 200 transactions per year that exceeded an aggregate amount of $20,000. The new, lower threshold was originally slated to apply to transactions paid in 2022, but on Dec. 23, acting Internal Revenue Service Commissioner Doug O’Donnell announced the delay to 2023 activity, “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry.”

Business owners “also need to be tracking the details when these third-party services are utilized to make non-business-related payments to friends and family, for things like reimbursement, and personal gifts,” added Sosa. “These kinds of payments are generally non-taxable and may need to be excluded if personal accounts are used for Venmo or other TPSOs. That’s one more reason why business network transaction accounts should always be separate from personal transactions, to help reduce unwanted IRS scrutiny.”

Pension plan changes

The bell will soon be tolling for many small New Jersey businesses that do not currently offer employees a pension plan, according to Charles Rosenberg, vice president at INTAC-FuturePlan. “Under the New Jersey Secure Choice Act, a state-sponsored retirement plan designed to help more private-sector employees save for the future, most businesses with 25 or more employees will have to establish a pension plan – or sign up with a state-designed one – that allows employees to contribute a portion of their pretax earnings to an individual retirement account via payroll deductions. As the program currently stands, employees will be automatically enrolled at a 3% contribution rate, unless they opt out or change their rate, and they may generally contribute $6,000 maximum to the plan per year in accordance with IRS guidelines.”

Originally, the state program was expected to be implemented March 28, 2021, but its rollout was delayed due to COVID-19 — and an official start date has not been announced. “Despite that, we’ve been getting calls from many employers who want to get ahead of the requirement,” Rosenberg added. “In today’s competitive labor market, employers are finding that a retirement plan is increasingly becoming a ‘must-have’ tool to attract and retain qualified employees.”

The federal government is also encouraging eligible small businesses, generally with 100 or fewer employees, with tax credits designed to help offset new pension plan startup costs. “In general, qualified small businesses may be able to file Form 8881, Credit for Small Employer Pension Plan Startup Costs and receive a dollar-for-dollar tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or 401(k) or certain other qualified plans,” he explained. “We’re also seeing more interest in Cash Balance Defined Benefit Plans, which may provide significant tax benefits to owners and key employees. They can be pretty complex, so sponsors should speak with their accountant or other adviser before adopting one.”

And the small business retirement landscape continues to change, according to Lee Sheilds, Marcum LLP’s office managing partner and partner-in-charge, Tax Services for Marlton and Northfield. “Business owners, for example, may be able to utilize a solo 401(k) plan that can enable them to shield up to $22,500 in 2023,” he said. “If they’re 50 or older, they may be able to make an additional ‘catch-up contribution’ of $7,500 in 2023.”

Businesses with 100 or fewer employees may also consider a SIMPLE-IRA, which enables employees to contribute up to $15,500 for 2023 ($19,000 if they’re 50 or older),” he added. “There are other small-business plans available, including a Simplified Employee Pension IRA (SEP IRA) and safe harbor 401(k), and each has its own benefits and restrictions, so a business owner should consult with their CPA or other adviser to review.”

Sheilds said his firm occasionally gets inquiries about the ability of a retirement plan to invest in so-called “alternative investments,” where funds are used to purchase assets like gold, precious metals and even business opportunities. “While some self-directed plans may allow these options, the rules need to be carefully reviewed and followed,” he explained. “Regardless of the specifics of the plan or the investments, having some sort of plan in place can be a great way for a business owner to reduce their current taxes while taking steps to build and grow a nest egg for when they do retire.”