Inflation soared in 2023, which means tax changes are on their way. Certain provisions of the IRS Code that were connected to specific dollar amounts allow for those amounts to increase in the case of inflation. Let’s review those changes.
Accounting methods
In accounting methods, the relevant changes include:
The threshold for qualifying as a small business taxpayer (this determines whether you can use a cash accounting method or gain an exemption from Sections 263A, 460, and 471, and from the business interest expense limitation in Section 163 (j))
The inflation adjustments for the amounts that business taxpayers can fully expense under Section 179 instead of capitalizing and depreciating those amounts, and a reduction of the percentage of a business’ bonus depreciation that can be claimed starting in 2023, which may benefit qualified taxpayers
You can find the adjusted-for-inflation amounts for tax years starting in 2023 in Rev. Proc. 2022-38, 2022-45 I.R.B. 445.
Qualifying as a small business taxpayer
According to Section 448(c), the “gross receipts test,” which determines who must use an overall accrual method for accounting, will adjust for inflation starting after December 31, 2018. This adjustment means that a C corporation, or partnership with a C corporation partner, may use the overall cash method for accounting starting with the tax year 2023—if the corporation’s average annual gross receipts for the past three tax years (ending before 2023), isn’t greater than $29,000,000. This is an increase from the 2022 amount, which was $27,000,0000, and the 2021 amount, which was $26,000,000.
Small business taxpayers also no longer have to:
Capitalize their additional costs (as per Section 263A)
Account for their inventoriable costs (as per Section 471)
Use the percentage-of-completion accounting method with long-term contracts (as per Section 460)
If a taxpayer uses an accrual method for accounting and doesn’t exceed the gross receipts test, they may be able to use the overall cash accounting method (including if they switched to the overall accrual method because their gross receipts exceed in a previous year) if they file an automatic accounting method change via Form 3115.
Additionally, a taxpayer who is currently capitalizing their costs via Sections 263A and 471, and/or who is using the percentage-of-completion method via Section 460, can file an automatic method change if they no longer want to use these methods.
Increasing the amount of the gross receipts test also affects the business interest deduction limitation (Section 163(j)). Starting in the 2023 tax year, a taxpayer whose gross receipts total $29 million will no longer have to abide by the business interest limitation. And since Section 163(j) isn’t considered an accounting method, a taxpayer qualifying as a small business will not have to file Form 3115 in order to gain an exemption from Section 163(j).
Under Section 448(c)(2), the gross receipts of some controlled corporations, partnerships, and proprietorships, as well as of affiliated service groups, must be aggregated when performing the gross receipts test. Also, at the start of every tax year, any taxpayer who is currently using the overall cash method and/or who is exempt from Sections 163(j), 263A, 471, and 460 must confirm that they still qualify as a small business based on the dollar threshold for that tax year. If they don’t qualify, they may need to switch to a proper accounting method and file a Form 3115 (or apply the Section 163(j) limitation for the current tax year).
Increase in the depreciable business assets a taxpayer can expense
The inflation adjustments also benefit a taxpayer who wants to expense qualifying depreciable business assets (via Section 179) instead of simply depreciating them. Previously, the limitation and phaseout to expense depreciable business assets using Section 179 had increased for inflation over a number of years.
Starting in tax year 2023, a taxpayer may deduct $1,160,000 in aggregate cost, which is an increase up from $80,000 in 2022. This limitation will be reduced based on the cost of Section 179 property that was put in service for the 2023 tax year, specifically, by how much that cost exceeds $2,890,000. This amount has increased by $190,000 from the year 2022. When it comes to sports utility vehicles, the costs that a taxpayer can take into account for the years 2023 and beyond have gone up by $1,900 (from $27,000 up to $28,900).
Now, property you can deduct under Section 179 may be:
Tangible property that qualifies under Section 168, purchased to be actively used in a trade or business
Computer software that qualifies under Section 197(e)(3) and Section 167
Personal property
Qualifying real property
The deduction must not be greater than the taxpayer’s taxable business income for that year.
If you’ve used the 100% bonus depreciation recently, Section 179 may be especially beneficial for you. This will start to phase down for property put in service after December 31, 2022. If you have property put in service in the calendar year 2023, your applicable bonus depreciation amount will go down to 80%. So, if you qualify, you may want to use Section 179 to maximize how much you can expense immediately and reduce how much you can recover through depreciation deductions.
Have questions about these adjustments and what they mean for your business? Connect with a tax professional and get all your questions answered through TaxGlobal.