Quick look: Tax season is here once again. And like in previous years, there are various tax credits and implications that SMBs and their brokers should familiarize themselves with. From retirement plan startup cost tax credits to extended deadlines for those impacted by natural disasters, here’s what to know in tax season 2023.
While navigating the current tax season, employers and brokers should remember that every business is unique and has a different situation. There is no one-size-fits-all solution for tax-related issues. Still, at the same time, business leaders crave some level of certainty as the world experiences rapid legislative and economic changes.
Here, review this year’s top changes and how SMBs can benefit from certain tax advantages, avoid penalties, and confirm they receive the most thorough and accurate advice.
The biggest changes happening in tax season 2023
From tax credits for research and development (R&D) initiatives to extended filing deadlines for organizations located in areas impacted by natural disasters, here are the tax policies making the largest waves in 2023.
Note: This is not an exhaustive list of changes affecting SMBs this tax year. For more information, please refer to your accountant and/or tax experts.
R&D tax credit
This general business tax credit is available to organizations that invest in qualified research and development activities to incentivize innovation and growth, as defined by Internal Revenue Code (IRC) Section 41.
A range of activities may qualify for the credit, including:
- Developing new products, processes, software, techniques, formulas, or inventions
- Improving or redesigning existing products
- Hiring scientists, designers, or engineers engaged in qualified activities
- Dedicating time and resources to new or innovative products
- Developing intellectual property
- Paying for salaries, supplies, contract research, and cloud hosting
The R&D tax credit is a dollar-for-dollar offset of federal income tax liability, and some businesses may apply up to $250,000 of their research credit against their payroll tax liability.
Per the IRS, businesses must provide the following information upon filing the refund claim:
- All business components to which the Section 41 research credit claim relates for that year
- For each component, all research activities performed and individuals’ names who performed each research activity, as well as the information each individual sought to discover
- Total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year using Form 6765
Inflation Reduction Act tax credits
Businesses may be eligible for one or more tax credits included in the Inflation Reduction Act. However, it’s important to remember that the Act contains a potentially complicated set of rules, and employers should pay close attention to relevant technicalities.
Notably, the Act has extended the Clean Vehicle Credit until the end of 2032 and includes credits for qualified commercial clean vehicles. The tax credits include up to $7,500 for the purchase of new eligible commercial clean vehicles.
The Inflation Reduction Act also includes the 179D Commercial Buildings Energy-Efficiency Tax Deduction. This tax deduction of up to $1.88 per square foot is available to owners of new or existing buildings who install interior lighting, a building envelope, or HVAC or hot water systems that reduce the energy and power cost of the lighting and systems by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1.
Work Opportunity Tax Credit (WOTC)
The WOTC allows companies to receive tax credits when they hire employees from groups that have consistently faced barriers to employment.
Per the U.S. Department of Labor, “Employers must apply for and receive a certification verifying the new hire is a member of a targeted group before they can claim the tax credit. After the required certification is secured, taxable employers claim the WOTC as a general business credit against their income taxes, and tax-exempt employers claim the WOTC against their payroll taxes.”
Targeted groups include:
- Qualified IV-A (“TANF”) recipient
- Qualified veteran
- Qualified ex-felon
- Designated community resident
- Vocational rehabilitation referral
- Summer youth employee
- Supplement Nutrition Assistance Program (SNAP) recipient
- Supplement Security Income (SSI) recipient
- Long-term Family Assistance (Long-term TANF) recipient
- Qualified Long-term Unemployment recipient
Retirement plans startup costs tax credit
The retirement plans startup costs tax credit allows qualified employers to claim a tax credit of up to $5,000 for three years for the ordinary and necessary costs of starting a SEP, SIMPLE IRA, or qualified plan—like a 401(k)—to enable and encourage more employers to offer retirement plans to their staff. Eligible costs include setting up, administering, and educating employees about the plan.
The credit is 50% of an organization’s eligible startup costs, up to the greater of:
- $500; or
- The lesser of:
- $250 multiplied by the number of non-highly compensated employees (NHCEs) who are eligible to participate in the plan, or
Employers can claim this credit if they:
- Had 100 or fewer employees who received at least $5,000 in compensation from the organization for the preceding year
- Had at least one plan participant who was an NHCE
- In the three tax years before the first year becoming eligible for the credit, their employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by them, a member of a controlled group that includes them, or a predecessor of either
Extended deadlines for those impacted by natural disasters
The IRS has provided later tax deadlines for millions of people in areas impacted by natural disasters. For example, the following groups now have an extended deadline of May 15, 2023:
- Victims of severe winter storms, flooding, landslides, and mudslides in California
- Victims of the January 12 severe storms, straight-line winds, and tornadoes in Alabama
- Victims of the severe storms, straight-line winds, and tornadoes in Georgia
Businesses that experience casualty losses from federally declared disasters can deduct it from their return for that tax year or the prior year. If it is beneficial for organizations to deduct the losses for the previous year, they may consider filing an amended return.
Business meal deductions
Businesses should note that the temporary business meal expense deduction that began January 1, 2021, as part of the Consolidated Appropriations Act, was extended throughout the 2022 tax year.
Per the IRS, organizations can deduct 100% of certain meals and beverages provided by restaurants after December 31, 2020, and before January 1, 2023. Historically, businesses could only deduct 50%.
Employers should note that the 100% deduction only applies to food and beverages provided by “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.”
Further, the deduction exception does not apply to refreshments from:
- A business selling pre-packaged food or beverages not intended for immediate consumption
- An eating facility on an employer’s business premises that furnishes meals excluded from an employee’s gross income under IRC Section 119
- An employer-operated eating facility treated as an IRC Section 132(e)(2) de minimis fringe even if operated by a third party under contract with the employer
A trusted partner for taxes and beyond
Staying on top of the latest tax rules is an intricate responsibility that takes substantial time and resources that many SMBs don’t have to spare. That’s where the partnership of a PEO, which the business’s broker can provide, can come into play.
Tax implications, as well as SMBs’ needs and situations, are constantly changing. The tax experts at a PEO can help employers avoid pricy back taxes by overseeing tax management and filing and can help business leaders take advantage of available tax credits.
Specifically, ExtensisHR’s payroll and tax professionals can assist with:
- Tax filing (federal, state, and local) and W2 preparation
- Payroll tax liability management
- Dedicated payroll manager and payroll processing
- Tax credit support, including WOTC
- Employee records maintenance
- And more
Whether you’re a business leader looking to simplify your tax process or a broker seeking a trusted PEO to provide tax services to your clients, ExtensisHR can help. Contact our experts to get started today.