Business tax changes affect companies of all sizes. Regardless of whether or not you own a large company, the ever-changing US tax laws will impact how you calculate your taxes. Hence, it would be best if you kept a watchful eye on these changes. And while it’s true that you can work with a tax professional in adopting these new laws, it would certainly help if you knew how the changes work and affect your business.
Here are some of the latest business tax changes you need to know and how they can affect your business.
Inflation Reduction Act (IRA)
In August 2022, Congress passed the Inflation Reduction Act, which imposes a 15% book minimum business income tax on companies with a profit of over $1 billion and a 1% excise on certain stock buybacks. This means larger companies will have a bigger tax burden to increase the government’s revenues.
Aside from this, the IRA will also include energy tax incentives. The act includes around $43 billion in tax credits to lower the country’s emissions. This means that energy-efficient appliances like rooftop solar panels and geothermal heating will become more affordable.
Deferred Social Security Taxes
For the 2020 tax year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act enables employers to defer deposits of their portion of Social Security taxes, which were due between March 27, 2020 and Dec. 31, 2020. But in 2021, half of these deferred taxes became due by Dec. 31, 2021, with the remainder coming due on Dec. 31, 2022.
Consequently, if small business owners did not pay the first half on time, the IRS considered all of the deferral invalid and assessed penalties on all of the deferred taxes using the original due date.
Employee Retention Tax Credit
The Infrastructure Investment and Jobs Act (IIJA), commonly referred to as the Bipartisan Infrastructure Bill, is a United States federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on November 15, 2021.
The act was initially a $715 billion infrastructure package that included provisions related to federal-aid highway, transit, highway safety, motor carrier, research, hazardous materials and rail programs of the Department of Transportation.
After congressional negotiations, it was amended and renamed the Infrastructure Investment and Jobs Act to include funding for broadband access, clean water, and electric grid renewal. This amended version included $1.2 trillion in spending, with $550 billion being newly authorized spending on top of what Congress was planning to authorize regularly.
The Infrastructure Investment and Jobs Act canceled the 2021 fourth-quarter employee retention tax credit. If small business owners did not claim this credit for Q4, they will not be able to do so. And if entrepreneurs already claimed it, they may be penalized unless they deposited the taxes on (or before) Dec. 20, 2021, or by Jan. 31, 2022.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December of 2021, provides several provisions to help individuals and businesses that give to charity. This business tax change extends (through the end of 2021) several temporary tax changes originally enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
It is important to note that the charitable contribution rule is advantageous for taxpayers for the 2021 tax year. A C corporation can deduct donations up to 25 percent – rather than the previous 10 percent of its taxable income.
Businesses who want to take advantage of this rule must elect the Increased Corporate Limit on a contribution-by-contribution basis. In addition, businesses donating food inventory can qualify for deductions of 25 percent, which is up from 15 percent.
This applies to taxable income for C corporations. S corporations, sole proprietorships, and partnerships, are based on aggregate net income for all trades or businesses from which the contributions are made.
Excess Business-Loss Limitation Rules
Businesses can carry net operating losses back five years or forward them indefinitely via a temporary suspension of Tax Cuts and Jobs Act rules in 2019 and 2020. But these rules are now back in place for the 2021 tax year. As a result, taxpayers cannot deduct losses of more than $524,000 if married and filing jointly–or $262,000 if they are single. This rule applies to all business income and losses, including Schedule C and pass-through entity income and losses.
And W-2 wages can no longer be used to offset the business losses. Spousal income is taxed separately and may result in a tax bill–even if the business losses are greater than the spousal income.
Is your head spinning? If the answer is a resounding yes, it may be helpful to contact your tax accountant. But whatever you decide to do, keep in mind that just staying on top of the continuous business tax changes is half the battle.
When you decide to work with NCH, we are partnered with a tax company that can help you prepare your personal and business income tax returns so you can focus on other important tasks in running your business. Call us at 1-800-508-1729 to learn more!