April 15 is still the annual tax deadline for many small businesses although, unlike individuals, small businesses can have varying deadlines depending on the type of company, the state the taxes are filed in, and other factors. Quarterly estimated tax payments are generally required throughout the year. And certain types of small businesses had to file by March 15.
Since business tax filing is complex, most experts recommend that small business owners work with a professional tax expert rather than trying to file on their own or even with tax-filing software.
But even if small business owners aren’t filing taxes themselves, it’s still important to stay informed about any tax changes during the year. Here are things small business owners should consider as the April 15 deadline looms.
Consider an extension
Because of some pending tax legislation in Congress this year, it might be a good idea to file for an extension. When you file an extension you still pay estimated taxes, but final paperwork isn’t due until September. This gives your tax provider adequate time to file a return. And it’s cheaper to file an extension than an amended return, which costs more in administrative fees.
One reason for an extension this year: a bonus depreciation write-off used by many small businesses is set to decrease for 2023. The bonus depreciation allowance was designed to spur capital purchases and it let businesses write off 100% of certain new and used assets in 2022.
But beginning in 2023, that will decrease to 80% for used assets, dropping another 20% each year thereafter. However, a tax bill pending in Congress could restore the write-off to 100%. It’s rare that there is such a significant tax bill pending in Congress when taxes are due.
Optimize your retirement plan
The Secure Act passed by Congress in late 2022 gives small businesses some tax advantages if they offer a retirement plan. There’s a tax credit for small businesses starting new employee plans. The credit is up to 100% of the startup costs for adopting and maintaining a new 401(k) plan, capped at $5,000. There’s also a tax credit based on employer contribution, up to $1,000 annually per employee, over the plan’s first five years.
Changes in research and development write-offs
Another concern is “Section 174,” a part of the tax code that involves writing off research and development costs. In the past, companies were able to deduct 100% of research and development expenses from their taxable income. That was helpful because often that deduction meant the company was operating at a loss and wouldn’t have to pay taxes.
But starting in 2022 due to new legislation, companies have had to “capitalize” the expense – or spread it out over several years. That means they must now write off the expenses over five years for U.S.-based R&D, or 15 years for foreign R&D expenses.
Avoid underpayment penalties
Yet another reason for small business owners to use a tax professional is the fact that underpaying will cost more this year. In the past, underpayment penalties hovered at around 3%, but this year they’re more than double at 8%. That’s because the penalties are based on the federal short-term interest rate plus three points.
One credit to skip: the ERC
At one time, the pandemic-era Employee Retention Credit seemed like a boon for small businesses. Designed to help small businesses keep employees during pandemic-era shutdowns, the generous credit let businesses file amended tax returns to claim the credit.
But that led to scammers trying to entice small businesses to help them file for the credit – for a fee – even if they didn’t qualify. The IRS has launched several initiatives to claw back some money improperly given to businesses. To date, the IRS said 500 taxpayers have given back $225 million via a voluntary disclosure program, which ended on March 22, that let small businesses who thought they received the credit in error give back the money and keep 20%. And 1,800 businesses have withdrawn unprocessed claims totaling $251 million.
The best thing small businesses can do is stay organized. A shoebox full of receipts isn’t helpful when trying to file timely taxes. Owners should log receipts in an orderly database they can turn over to their adviser. And stay on top of quarterly estimated payments.
Should you have any questions or concerns about the Legal Issues Impacting Your Tax Strategy, please reach out to Derek Saunders, Keith Strahan, or Richard Armstrong of our firm, shown here: https://lfbrown.law/our-team
