January 1 marks the start of the new year and with a new year comes new tax law changes. If you’re an Ohio State Buckeyes fan, your New Year did not begin exactly how you wanted to, but the year looks bright going forward. As we begin the new year, it is important to understand some recent tax changes to prepare for the 2023 tax season.
Full Business-Meal Deduction Expires
In response to the unprecedented COVID-19 pandemic, under the Taxpayer Certainty and Disaster Relief Act of 2020, Congress temporarily increased the business-meal deduction from 50 percent to 100 percent. The business-meal deduction allows a business to claim a 100% income tax deduction for food or beverage expense at restaurants. Unfortunately, this temporary extension expired on Dec. 31, 2022. Therefore, going into 2023, businesses will default back to the 50 percent limitation for business-related meals.
100% 1st-Year Bonus Depreciation Decreases
In 2018, under the Tax Cuts and Jobs Act, first-year bonus depreciation increased to 100% for “qualified property” and “qualified improvement property.” Qualified property included tangible assets with a depreciation life of 20 years or less (i.e., certain vehicles, furniture, manufacturing equipment). While qualified improvement property consisted of improvements to the interior of existing nonresidential real property. Under the structure of the bill, this increase in bonus depreciation began to phase out on Dec. 31, 2021. Beginning on Jan. 1, 2023, the bonus depreciation will begin to decrease by 20% for each subsequent year (e.g., 80% – 2023, 60% – 2024, etc.). Unless changed by a subsequent law, the bonus depreciation will be fully phased out by 2027.
$600 Transaction Reporting Postponed
Under the American Rescue Plan Action of 2021, Congress required third-party settlement organizations (e.g., Venmo, Paypal, etc.), to report transactions on Form 1099-K, Payment Card and Third-party Network Transactions, any transaction with a threshold of $600 or greater. Before this law, third-party settlement organizations were only required to report if gross payments exceeded $20,000 and there were greater than 200 transactions.
On Dec. 23, 2022, the IRS announced that it was creating a transition period for the implementation of the reduced threshold (see IRS Notice 2023-10). Therefore, for transactions before Jan. 1, 2023, a taxpayer is only required to report, via Form 1099-K, aggregate payments that exceed $20,000 and had participating payees exceeding 200. For tax year 2023 and beyond, taxpayers will be required to report any aggregate payments that exceed $600. Please note that taxpayers are not necessarily required to issue 1099-Ks for personal-related transactions such as splitting the costs of a cab or meal, sending money for birthdays or paying a family member for a bill, based on Internal Revenue commentary.