Small Business Tax Update 2023: Higher Tax Bills … and a Credit?

You’ve probably already heard that the end of pandemic-era tax credits is adding up to smaller tax refunds this year for individuals. But will business owners face higher tax bills this year, too?

Says small business accountant James Kauffman, whether you’re a business or an individual, it’s adding up to a lot of the same. “Most of the credits from the pandemic have expired,” Kauffmann indicates—and that goes for business owners, too.

The reason is pretty simple: in response to the pandemic, lawmakers ushered in a rush of increases to existing tax credits alongside entirely new changes, like stimulus checks for individuals and PPP loan access for small businesses. Now, indicates Kauffmann, the IRS may be looking to change gears.

Case in point: the much-ballyhooed reports in 2022 indicating that small businesses earning income via Etsy, Poshmark, eBay, Venmo, and other digital sales platforms would be under increased tax scrutiny this year. As Business News Daily shared, “small business owners and freelancers who receive more than $600 from third-party digital platforms will need to include that amount in their income.” Initial info from the IRS was that a 1099-K for 2022 sales would be issued directly from the platforms where the small business received its income, although in a December 2022 follow-up, the IRS indicated it would hold off on the requirement until later this year.

Need Tax Relief? Check the Employee Retention Credit.

Aside from the removal of most pandemic-era deductions, however, there are really no other new-in-2022 changes to federal taxes for small businesses, says James Kaufmann. Plus, he notes, “There are some deductions and things of that nature that people can still use as business owners,” including the Employee Retention Credit.

The credit, says Kauffman, was set up as a way “for small businesses to keep people on the payroll” through Covid-related government mandates and slowdowns. While the Employee Retention Credit period ended in 2021, businesses have a few more years to file a return or an amended tax return, if they already filed their taxes, to tap into the cash.

How Does the Employee Retention Credit Work?

The Employee Retention Credit is a tax credit for small businesses and can add up to $26,000 per employee retained through pandemic shutdowns and slowdowns. It was part of the CARES Act and works by reducing the total amount of taxes a business owes to the IRS during applicable years.

Importantly, the Employee Retention Credit is a refundable tax credit (there is a small portion of it, however, deemed “nonrefundable”). So if a business’s credit is greater than its federal employment taxes, it could mean a reduction of money owed or even a refund check. 

To be eligible to receive up to $26,000 per employee from the Employee Retention Credit, a business needs to meet the following criteria:

• Private-sector or tax-exempt organization that carried out business in 2020 and/or 2021 
• Paid w-2 wages to employees in qualifying periods of 2020 and/or 2021
• Experienced hardship in one of the following areas:
  • You were forced to suspend your business’s operations, including limiting commerce travel or group meetings, fully or partially due to COVID-19 government orders, or
  • You experienced a significant decline in gross receipts beginning in the first quarter of 2020.
• Qualify as a “recovery startup” 

While the Employee Retention Credit only covers businesses for losses across specified quarters of 2020 and 2021, it’s still an active credit for businesses to claim—until 2025, in some cases. To do so, a business is required to prove its eligibility, so knowing the definitions of a partial business suspension or a significant decline in gross receipts is critical. Since the credit itself covers 170 pages of instructions and IRS documentation, it’s often easier to check online first to see if and how much you’re eligible for before starting the filling process.

Other 2023 Small Business Tax Considerations…

Experts are warning that, in addition to lower tax refunds this year, individuals and businesses should also expect slower refunds. Why? Because the IRS is still facing a backlog from 2022. 

Plus, Kauffmann also recommends keeping good records—this year and every year—in case you’re audited. “The Federal Government, the IRS, they hired additional people. So there are very good reasons—even stronger now—to keep good records and report the proper amount. It’s strong advice: keep good records and write down the expenses. Be careful,” Kauffmann says.

_{Information provided on this blog is for educational purposes only , and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strivers to keep its content up to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}