Preparing for Filing Your Business Tax Return and Tax Changes in the 2023 Filing Season

It's an annual chore: filing income tax returns for your business. This includes filing federal income tax returns, as well as state and local returns, for businesses and for owners. There is no way to avoid this chore. The best way to handle this responsibility is to be prepared and get started as soon as possible.

When Are Business Taxes Due in 2023?

Pay attention to the filing deadline for 2023 income tax returns. If you miss the deadline, you may incur late-filing penalties—and these penalties are not tax-deductible. The following are federal income tax return deadlines for 2022 returns:

• For entities: Partnerships and S corporations reporting on a calendar year basis, which most do, must file their 2022 income tax returns by March 15, 2023. Calendar-year C corporations must file their 2022 income tax return by April 18, 2023 Limited liability companies (LLCs) with multiple members file partnership returns unless they have elected to be taxed as corporations; one-member LLCs file their return with the owner's personal tax return. Sole proprietorships also file their business return with the owner's personal tax return.
• For owners: Business owners must file their personal 2022 income tax returns by April 18, 2023.

Check your state for its filing requirements. Many states have the same filing deadlines as the ones for federal income tax purposes. If you do business in more than one state, you may have to file multiple state income tax returns. Pay special attention to filing requirements for businesses doing online transactions. Some states consider this a sufficient connection ("nexus") to them such that state tax returns are required there.

The federal filing deadline may be extended if you are located in an area that's been declared a federal disaster area. There is an automatic 60-day filing extension for disaster victims, but the IRS may grant even more time to file. For example, victims of Hurricane Ian that began in Florida on September 23, 2022, and who had obtained a filing extension (explained below) for their 2021 income tax returns to October 17, 2022, were given until February 15, 2023, to file those returns. The IRS provides more information about filing extensions for disaster victims.

File an Extension for Business Taxes

If, for any reason, you cannot meet the applicable filing deadline, you can obtain an automatic six-month filing extension just by asking for it; no explanation is needed. You must submit the request no later than the filing deadline. Entities use IRS Form 7004 to request a filing extension. Individuals (including sole proprietors, self-employed individuals, and one-member LLCs) use IRS Form 4868.

Getting more time to file the return does not give you more time to pay taxes due. It's advisable to pay as much as you expect to owe to minimize or avoid late-payment penalties. These penalties start to run from the filing deadline without regard to extensions.

How To File Taxes for a Business

Most business tax returns are e-filed. According to the 2021 IRS Data Book, 91% of S corporation returns were e-filed during the government's 2021 fiscal year ending September 30, 2021. There are two very good reasons for this:

1. E-filing is the quickest way to have a return processed, especially given IRS personnel problems and a backlog of processing paper returns.
2. Tax return preparers who file more than 10 returns in the 2023 filing season must e-file, with very limited exceptions.

Choose Your Tax Preparation Method

Decide as soon as possible who is going to prepare and file the return(s). Will you use a CPA or other tax professional? Will the business returns be handled in-house by a company employee? Are you planning to prepare your business and personal returns using tax preparation software?

If you want to use a CPA or other tax professional, as most businesses do, and haven't been working with one, explore your options. Make sure you vet them before making a selection. The IRS has tips on choosing the right tax return preparer for your situation.

If you work with a tax professional, schedule an appointment as soon as possible to discuss your situation.

Gather Your Tax Records

Tax return information is based on the records you have on income and expenses for the year. Typically, this information is in your desktop or cloud-based accounting system and can easily be accessed by a tax professional or other return preparer to complete the return. For example, payroll information about what the business paid in wages and compensation as well as employment taxes — all of which factor into the income tax return — should be easily found in your accounting system.

In addition to annual income and expenses tracked in the accounting system, be sure to have various records and other information on hand to help with return preparation:

• Prior year returns. These show potential carryovers that can be used on current returns to reduce tax liability. They include, for example, net operating losses, general business credit, and capital losses.
• Information about owners' investments. Because partnerships and S corporations pass through income and losses to owners, it's essential that owners know their "basis" in their company. If losses are passed through, they are deductible on an owner's return only to the extent of such basis. For example, an S corporation owner's basis is the amount invested in stock or loans made by the owner to the corporation. Basis information must be included on the tax return using Form 7203 and, where losses are claimed, on Schedule E of Form 1040 or 1040-SR. Partnerships must report on Schedule K-1 of Form 1065 a partner's beginning and ending capital account. The capital account is the amount of capital contributed to the partnership during the year, the partner's share of the partnership's current year net income or loss as computed for tax purposes, any withdrawals and distributions made to the partner by the partnership, and any other increases or decreases to the capital account.
• Asset information. If the business sold assets, it's necessary to have information about their basis to figure gain or loss. For example, if the business sold a building, basis used to determine gain or loss takes into account what the business paid for the building, depreciation claimed for it, and other adjustments.

Supplemental Tax Information

Business deductions and credits cannot be created out of thin air and must be substantiated by receipts, invoices, canceled checks, and other documentation. This supplemental tax information is not submitted with the return, but should be retained and easily accessible in case of an audit.

In addition to receipts or other paperwork that prove expense amounts, tax law requires additional documentation in some situations. Examples of required documentation include:

• Special recordkeeping for travel, meals, vehicle, and business gifts. Receipts alone are not sufficient to back up deductions claimed for these expenses. Required records are explained in IRS Publication 463.
• Substantiation for charitable giving. If the business made donations of $250 or more, a written acknowledgment from the organization is required. This and other substantiation rules for charitable donations are in IRS Publication 526.

Consider the Impact of Out-of-State Workers

For federal income tax purposes, the fact that many businesses use remote workers is not important. But for state and local income tax purposes, this situation may create tax filing problems. Businesses normally file their state income tax returns according to "nexus," meaning where they have a business connection. Typically, this is where the company is physically located ("physical presence"). However, having workers in another state may create the nexus sufficient to require filing an income tax return and paying state and local taxes in that location.

Check the income tax rules for all states in which you have employees working remotely (you should know who they are through your payroll system) to determine if you have income tax obligations there.

Consider Post-Year-End Tax Saving Strategies

The calendar shows that last year has ended, but the opportunities for obtaining additional tax deductions are still available. These involve taking certain actions and making certain elections on tax returns. Here are some examples:

• Maximize retirement plan contributions. The deadline for making tax-deductible contributions to a qualified retirement plan is the extended due date of the return. Don't have a qualified retirement plan for the business? One can be set up and funded through the extended due date. More information about setting up and contributing to a qualified retirement plan, as well as tax credits for doing so, may be found in IRS Publication 560.
• Decide how to write off the cost of equipment. If the business bought equipment, machinery, or certain other property in 2022, there are a number of ways to deduct the cost. These include first-year expensing (Section 179 deduction), bonus depreciation, regular depreciation, and a de minimis safe harbor election. The decision on which method to use is made when the return is filed. The choice can affect taxes this year and in years to come. More information about these options is in IRS Publication 946.
• Check for research credit refunds. If your company engaged in research activities in 2022, you may not be able to use the full tax credit figured on research expenditures. The credit, which is part of the general business credit, is subject to a one-year carryback. If you're making a claim for a refund based on the research credit, be sure to include all information that's now required.

Business Tax Changes to Be Mindful of When Filing in 2023

Whether you're an experienced business owner or just getting started, tax credits and deductions are continually changing. Here are some new developments that you should be aware of to ensure your taxes are correctly filed and you're not missing anything come the tax deadline in 2023.

As a reminder before taking any action, speak to your CPA, tax professional, and/or legal adviser to determine the best course of action for your business.

Some Old Rules and Some New Rules

Some tax rules had been temporarily put in place to provide relief during the pandemic. These rules expired, letting previous rules come back into place for 2022 returns. What's more, some rules that had been set to expire at the end of 2021 have been extended or modified for 2022. The changes to note on the 2022 return include:

• Charitable contribution limits. The 25% taxable income limit for donations by C corporations that applied in 2021 is back to the standard 10% limit in 2022. For owners of pass-through entities, the limit on their share of cash contributions made by their businesses that was up to 100% of adjusted gross income in 2021 reverts to the 60% limit. What's more, there's no option for deducting cash contributions in 2022 by individuals who don't itemize deductions.
• Alternative energy improvements. The percentage of the cost of solar panels and other alternative energy improvements, which was supposed to decline to 26% in 2022, has been fixed at 30%.
• Amortization of R&D expenses. Before 2022, these expenses could be deducted in full in the year they were paid. Beginning in 2022, they must be amortized (deducted ratably) over no less than five years (15 years for foreign R&D).
• Tax credit for buying clean vehicles. The tax credit limit for purchasing an electric vehicle in 2022 is the same as it's been: $7,500. However, for purchases on or after August 16, 2022, there's a final assembly requirement that must be made in order to claim the credit.
• Paycheck Protection Program loan forgiveness. The amount of the loan forgiven is viewed as tax-exempt income; it doesn't increase reportable income. But it's taken into account in figuring gross receipts for purposes of determining eligibility by some businesses to use the cash method of accounting. It's factored into a partner's basis.

Adjustments for Inflation

Each year, the IRS adjusts dozens of tax items to account for inflation. For example, tax brackets have been adjusted for individuals, impacting what owners of pass-through entities pay on their share of business income. Some other items impacting businesses due to cost-of-living adjustments (COLAs) include:

• Standard mileage rate for business driving. If actual expenses aren't deducted, then the IRS-set rate is 58.5¢ per mile for the first half of 2022 and 62.5¢ per mile for the second half of 2022.
• Small employer's health insurance credit. Eligibility for this credit is based in part on wages; the amount has been adjusted for inflation for 2022.
• Gross receipts test. This test is used to determine whether a business can use the cash method of accounting, forego doing inventory accounting, and for certain other purposes. The gross receipts test in 2022 is $27 million in average annual gross receipts in the three prior years.
• Sec. 179 deduction (first-year expensing). Instead of depreciating the cost of machinery, equipment, and other eligible property placed in service before the end of 2021, an immediate deduction up to the 2022 limit ($1,080,000, reduced dollar for dollar for purchases in excess of $2,700,000).
• Limitation on losses for noncorporate taxpayers. The limitation that caps losses for the current year has increased; excess losses become part of a net operating loss that can be used in future years.
• Qualified business income (QBI) deduction. The taxable income threshold above which the QBI deduction may be limited or barred has increased for 2022.

Other Reminders

When filing the 2022 income tax return, keep in mind some other tax rules. These include:

• E-filing. Some businesses must e-file their returns; others should consider doing so. The IRS backlog on unprocessed paper returns demonstrates the need to file the return electronically. This is especially true for those expected a tax refund.
• Estimated taxes for 2023. The first installment of estimated taxes for individuals and calendar-year corporations is due on the same day as 2022 income tax returns are filed. Obtaining a filing extension for filing the 2020 return does not give you more time for paying estimated taxes for 2023. Check with your tax professional about new tax rules that may affect 2023 taxes.

Begin Filing Taxes for Your Business, and Stay Current on Tax Laws

By starting sooner and doing some prep work, you can make filing taxes for your business a more efficient and less stressful process. With changes in the law and new IRS guidance, you'll want to consult with your accountant to ensure you understand what is required to stay compliant, as well as learn about additional opportunities for tax savings available to you through credits. Paychex offers tax services that can help your business navigate the complexities of filing taxes.