Look out for these tax changes in 2023 and for what is to come on the horizon.
Like clockwork, they come. Quarterly. Annually. Every year. Taxes. But, while some things never change when it comes to paying them, how much you pay can be a moving target from year to year.
In some years, there are a host of changes. These are a few that businesses need to keep an eye on and be prepared for this year.
The first will not impact all companies, but the companies that it does impact could be hit hard by the change in the treatment for research and development (R&D) expenses. R&D expenses heretofore have been deductible in the year incurred, and that can be a large number. A company doing extensive R&D is spending hundreds of thousands to millions of dollars on R&D. For tax purposes, those expenses used to be deducted in the year they were incurred; those now have to be capitalized and amortized over five years. Ultimately a company will deduct the entire amount, but not in the year it is incurred. However, this change does not impact the eligibility or the calculation of the R&D tax credit.
Another tax law change that’s going to hit almost every company is bonus depreciation. This year, it will downgrade from allowable fixed asset expensing at 100 percent to 80 percent. So fixed assets that are purchased in 2023 that qualify for bonus depreciation will receive 80 percent bonus depreciation instead of 100 percent. Bonus depreciation will phase downward through 2026 to 20 percent bonus depreciation. One way to mitigate this change is the utilization of the 179 election. That allows 100 percent of additions to be depreciated in the year of acquisition up to a certain threshold if the taxpayer is in a taxable income position.
Another possible change to be aware of would impact C corporations if it materializes. In March 2022, the Biden administration released its tax proposals for fiscal year 2023, and within them, President Biden called for an increase on the tax rates for C corporations. Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, a C corporation’s tax rate could be as high as 35 percent before any tax credit offsets. TCJA reduced that initial percentage to a flat rate of 21 percent. The administration’s proposal would almost split the difference and increase the rate to 28 percent. If voted into law, this increase would hit all C corporations with an immediate 7 percent hike in their tax rate. This could be passed to be implemented on a future date or it could be retroactive tax legislation.
What’s Going Away
For the most part, COVID-19-era tax credits have expired. The one that continues to pop up is the employee retention credit (ERC), not because it’s still in existence—that credit ended Q3 2021—but because it’s not too late to amend returns and claim the credit if you qualified for it in 2020 or 2021.
Form 941-X, which is the amended payroll tax return to claim a refund up to three years after filing or two years after paying, whichever is later, can still be filed. If a company did qualify, it can amend returns. It requires amending payroll tax returns and the business tax returns, and if it’s a pass-through, that also means amending personal returns.
“It could require several amendments, but it could certainly be worth it,” Dallas-based EisnerAmper Partner Angie Walters says. “I’ve seen ERC credits in the millions of dollars.”
Another tax sunset to watch is that of the qualified business income (QBI) deduction that is part of the aforementioned TCJA. This 2017 Trump-era tax credit is set to
sunset in 2025 along with several other provisions.
“When it comes to tax law, nothing is ever forever,” Walters says. “The QBI deduction is a massive tax credit, and it’s not a tax deduction—it’s a dollar-for-dollar payroll tax credit. So that’s going to make a big difference for a lot of individuals who own their own business.”
The QBI deduction, also known as the Section 199A deduction, allows for a 20 percent deduction for some business owners—sole proprietorships, partnerships, and S corporations, as well as some trusts and estates. It’s a pass-through tax deduction for individuals who have pass-through income from trade and business companies.
Additionally, individual tax rates will increase back up to the maximum of 39.6 percent with the expiration of TCJA. The estate tax exemption is going to be reduced by roughly half, to $6 million after adjustment for inflation. The $10,000 state tax cap will be removed, and the standard deduction goes back to the pre-TCJA amount, which is about half of what those standard deductions are currently. The child tax credit has already been reduced from $3,600 to $2,000
“There are some big things on the horizon, not in 2023, but on the horizon, that are set to sunset without some intervention from legislation,” Walters says.
What’s the Plan
When it comes to planning, Walters says, talk to your tax advisor early and often about what you’re doing. There are strategies to structure planning that can be more tax efficient than others. Don’t make big decisions or big purchases, including acquiring businesses, without talking to your advisors first and ensuring that the way you are structuring it is the best, most tax-advantageous way for your company.
“The best advice I can give is to stay up to date,” Walters adds. “Maintain accurate books and records throughout the year. Don’t let yourself get behind on your books and records, on your reconciliations and on making sure you have receipts for everything. And don’t procrastinate. Procrastination is not your friend when it comes to accounting.”