New Tax Rules and the Digital IRS: A Blueprint for Small Business Owners

Navigating tax law has become increasingly complex for small business owners, particularly in the wake of rapid changes before and after the COVID-19 pandemic. Tax law changes such as the Tax Cut and Job Act (TCJA) of 2017, the Coronavirus Aid Relief and Economic Security Act (CARES Act) of 2020, the American Rescue Plan Act (ARP) of 2021, and the Inflation Reduction Act (IRA) of 2022 have created a complex matrix of obligations and opportunities for businesses. In a world that’s steadily moving towards digitalization, even the IRS is transforming, enhancing its interaction with taxpayers through technology. As the 2023 tax year unfolds, small business owners must pay careful attention to the expiring provisions, new rules, and a digitalized IRS, all of which we’ll explore in the sections below. Understanding these changes is no longer optional but vital for ensuring compliance and harnessing opportunities in the post-pandemic era.

NET OPERATING LOSS

Net operating losses are created when business deduction exceeds gross income. The CARES Act of 2020 temporarily allowed businesses to carry back net operating loss (NOL) for up to 5 years and carry forward indefinitely to offset income for losses incurred in taxable years beginning in 2018, 2019, and 2020. Businesses could offset 100% of their taxable income under this rule. However, for tax years beginning after 2021, the loss deduction is limited to 80% of taxable income instead of 100%. In addition to this new rule, the losses incurred on the 2021 tax returns cannot be carried back and must be carried forward indefinitely. This new rule does not apply to losses incurred before December 31, 2017, and is not subject to the 80% limitation.

BONUS DEPRECATION

Bonus depreciation is an accelerated tax deduction where taxpayers can write off a certain percentage of the purchase price of the acquired asset on qualified property in the first year of acquisition. The TJCA in 2017 has allowed businesses to take advantage of full bonus depreciation on qualified property placed in service during the year. However, business depreciation will decrease by 20% each subsequent year for property placed in service after December 31, 2022, and before January 1, 2027, when bonus depreciation will be completely phased out.

REVISITING TAX CREDITS

The CARES Act enacted in 2020 provides businesses a payroll refundable tax credit through Employee Retention Credit that encourages employers to retain employees during the economic hardship caused by the pandemic. This credit has since expired on December 31, 2021; however, qualifying businesses can still retroactively receive these credits if they didn’t claim them on the original returns by amending their 2020 and 2021 quarterly employer federal tax returns. The deadline to amend the 2020 quarterly returns is April 15, 2024, and the deadline for the 2021 quarterly returns is April 15, 2025.

SUCCESSION PLANNING: ESTATE EXEMPTION UPDATE

The economic crisis during the pandemic has made apparent the importance of succession tax planning for the success of the business and the generational wealth it creates. Business owners might not know the future but can plan for it by considering estate planning. The Inflation Reduction Act of 2022 has temporarily adjusted the estate tax annual exclusion for 2023 to $12.92 million ($25.84 million for married couples), and the annual gift tax exclusion for 2023 has increased to $17,000. The increase in the estate and gift tax exemption will allow taxpayers to make additional lifetime gifts without incurring or reducing gifts or estate tax before the exemption decreases in 2025.

IRS DIGITALIZED

The Inflation Reduction Act, signed in 2022 by President Biden, will fund the digitalization plan set forth by the Internal Revenue Service. The IRS Modernization Plan released in 2019 maps out a six-year plan to provide a secure and efficient taxpayer interaction with the agency, such as responding to notices and penalties in real-time, faster refunds, electronically filing certain types of tax returns, live chatting, and accessing support through secure online services. As of March 2023, the IRS is scanning taxpayers’ documents, known as Digital Intake, to eliminate paper backlog and delayed refunds. According to the U.S. Treasury released statement, the modernization plan will operate during a ten-year timeline transforming the IRS from the 1960s to the 21st century.

CONCLUSION

The constantly evolving tax climate, reflecting the larger shifts in the economy and society, calls for agility and strategic foresight for small business owners. It underscores the need for expert guidance and a nuanced understanding of the tax landscape. With stakes higher than ever in terms of compliance and opportunity, engaging with the complexity of the tax reforms becomes a central part of the strategic planning that will define success in this new era. As the clock ticks towards critical deadlines and milestones, small businesses must look beyond mere compliance and leverage these changes as vital tools in their journey to resilience and growth. Trying to manage business decisions without knowing the future could be difficult, which is why we are here to assist with planning and keeping up with ever-changing tax reforms.

By Febby Sugianto, Supervisor, Tax & Business Services