Significant New Tax Laws for Small Business

Federal tax laws for small businesses undergo frequent revisions. Recent legislative changes have introduced new deductions, altered existing credits, and imposed different reporting obligations. This article covers several updates affecting how small businesses calculate taxes and report financial information.

Major Adjustments to Taxable Income Calculation

Recent tax law modifications altered primary deductions businesses use to determine taxable income. The updates impact major areas of business investment, from equipment purchases to innovation efforts.

Bonus Depreciation Phase-Down

A change for businesses that invest in equipment is the scheduled phase-down of bonus depreciation. The rate, which allowed a 100% first-year deduction, dropped to 80% for property placed in service in 2023 and is 60% for 2024. This reduction impacts a company’s ability to accelerate deductions and lower its immediate tax liability.

Eligible assets include property under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less, such as machinery, equipment, and furniture. For example, on a $50,000 equipment purchase, the 60% rate allows a $30,000 first-year deduction, with the remaining $20,000 depreciated over the asset’s standard life.

The bonus depreciation rate is scheduled to fall to 40% in 2025 and 20% in 2026, before being eliminated in 2027. The eligibility date is not the purchase date but the “placed in service” date, meaning the asset must be ready for its intended use within the tax year to qualify for that year’s rate.

Research and Development (R&D) Expense Amortization

A change under Internal Revenue Code Section 174 affects how businesses treat R&D costs. Immediate expensing is no longer allowed; businesses must now capitalize these costs and amortize them over five years for research conducted within the United States. For research conducted outside the U.S., the amortization period is 15 years.

This deferral of deductions can lead to a higher taxable income in the short term. For example, a business with $200,000 in domestic R&D costs can no longer deduct the full amount upfront. Due to a mid-year convention rule, the first-year deduction is limited to 10% of the total, or $20,000, with the remainder deducted over the next several years.

R&D expenses include salaries for researchers, supply costs, and expenses for developing prototypes or software. This requirement demands careful tracking and classification of R&D expenditures.

Business Interest Limitation

An adjustment has been made to the rules under Section 163(j) limiting the deductibility of business interest expense. The deduction is capped at 30% of a company’s adjusted taxable income (ATI). For recent tax years, the formula for ATI has become more restrictive.

Businesses are no longer permitted to add back depreciation and amortization when calculating their ATI. This change results in a lower ATI for many businesses, which in turn lowers the 30% threshold and reduces the amount of business interest they can deduct. The modification affects capital-intensive businesses with high debt loads.

Available Tax Credits and Incentives

Small businesses can use tax credits to reduce their tax liability on a dollar-for-dollar basis. Recent legislation introduced new credits and expanded existing ones for activities like clean energy adoption and establishing employee retirement plans.

Clean Energy Credits

The Inflation Reduction Act introduced tax credits to promote clean energy adoption. The Commercial Clean Vehicle Credit under Section 45W provides up to $7,500 for purchasing a new clean vehicle weighing less than 14,000 pounds, and up to $40,000 for heavier vehicles. The vehicle must be a depreciable asset and powered by an external source of electricity.

Another incentive is the Energy-Efficient Commercial Buildings Deduction, governed by Section 179D. This allows building owners a deduction for installing energy-efficient systems like upgraded HVAC or lighting. The deduction can be as high as $5.00 per square foot if the project meets energy savings thresholds and adheres to prevailing wage and apprenticeship requirements.

Businesses can also receive a credit for installing alternative fuel vehicle refueling property, such as EV chargers. This credit can cover up to 30% of the property’s cost. These incentives are designed to lower the financial barrier for businesses investing in sustainable technologies.

Retirement Plan Startup Credits

The SECURE 2.0 Act enhanced tax credits for small businesses that establish new employee retirement plans. For businesses with 50 or fewer employees, a credit covers 100% of administrative startup costs, capped at $5,000 annually for three years. For businesses with 51 to 100 employees, the credit is 50% of those costs.

A new credit was also introduced to incentivize employer contributions for the first five years of a plan. It is a percentage of employer contributions, up to $1,000 per employee earning no more than $100,000 annually. For employers with 50 or fewer employees, the credit is 100% of contributions in the first two years, then phases down to 75%, 50%, and 25% over the next three years.

These credits can be claimed together. An additional credit of $500 per year for three years is available for plans with an automatic enrollment feature, which is required for most new plans starting in 2025.

Employee Retention Credit (ERC) Developments

While the Employee Retention Credit (ERC) was a pandemic-era measure, recent developments focus on compliance. Due to a high volume of improper claims, the IRS placed a moratorium on processing new claims filed after September 14, 2023. The agency has increased its scrutiny of both pending and paid claims, leading to more audits.

The IRS introduced programs for businesses that may have incorrectly received the credit. The ERC Voluntary Disclosure Program (VDP) allowed businesses that erroneously received the credit to repay 85% of the amount to avoid penalties and interest.

For businesses that filed a claim but have not received payment, the IRS established a claim withdrawal process. This allows taxpayers to retract a pending claim without penalty if they find they are ineligible. Businesses that claimed the ERC should consider reviewing their eligibility with a tax professional.

Significant New Information Reporting Rules

Small businesses are now subject to new information reporting requirements. These rules mandate disclosing specific data to government agencies, and failure to comply can result in significant penalties.

Beneficial Ownership Information (BOI) Reporting

The Beneficial Ownership Information (BOI) reporting rule, from the Corporate Transparency Act, is administered by the Financial Crimes Enforcement Network (FinCEN). A March 2025 rule significantly altered these requirements, exempting all entities created in the United States from the BOI reporting mandate. This change removed a compliance burden that was expected to affect millions of domestic small businesses.

The definition of a “reporting company” has been narrowed to include entities formed under the law of a foreign country that have registered to do business in the United States. These foreign-based entities must still file BOI reports with FinCEN, providing details about the company and its beneficial owners.

Specific deadlines apply to these foreign entities. Companies registered to do business in the U.S. before March 26, 2025, must file their initial report by April 25, 2025. Foreign entities registering on or after that date have 30 calendar days to file.

Form 1099-K Reporting Threshold Status

The reporting threshold for Form 1099-K, used by third-party settlement organizations (TPSOs) like PayPal to report payments, has been in transition. The IRS has delayed implementing a planned $600 threshold.

For the 2024 tax year, TPSOs are required to issue a Form 1099-K only when payments to a recipient exceed $5,000. The IRS has announced that 2025 will also be a transition year, with the threshold expected to drop further in the future, potentially to $600 for the 2026 tax year.

This phased approach gives taxpayers and TPSOs time to adjust. Businesses must report all taxable income from these platforms, regardless of whether they receive a Form 1099-K.

Digital Asset Transaction Reporting

New rules enhance tax reporting for digital assets like cryptocurrency. Starting with transactions on or after January 1, 2025, brokers facilitating digital asset trades must issue a new Form 1099-DA, “Digital Asset Proceeds from Broker Transactions.” These forms will be sent to taxpayers and the IRS in early 2026.

The form will report gross proceeds from the sale or exchange of digital assets. For transactions in 2026 and beyond, brokers will also be required to report the cost basis of the assets sold. This requirement aims to increase transparency and help taxpayers accurately report gains and losses.