2023 Year-End Tax Planning for Business Owners

Maxwell Locke & Ritter has outlined a few 2023 year-end tax planning ideas for business owners.

Depreciation-Based Deductions

As the year draws to a close, a business may benefit from one or more of three depreciation-based tax breaks: (1) the Section 179 deduction; (2) first-year “bonus” depreciation; and (3) regular depreciation.

YEAR-END MOVE: Place qualified property in service before the end of the year. If your business does not start using the property before 2024, it is not eligible for these tax breaks.

1. Section 179 deduction: Under Section 179 of the tax code, a business may currently deduct the cost of qualified property placed in service during the year. The maximum annual deduction, as shown below, is phased out on a dollar-for-dollar basis above a specified threshold for assets placed in service during the year. For 2023, the deduction limit and phase-out threshold are $1,116,000 and $2,890,000, respectively (the amounts for 2024 are $1,220,000 and $3,050,000). Be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2023.
2. First-year bonus depreciation: The TCJA authorized 100% first-year bonus depreciation through 2022, subject to a phase-out over a five-year period. The applicable percentage for 2023 is 80% and is scheduled to drop to 60% in 2024.
3. Regular depreciation: If any remaining acquisition cost remains, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).

Tip: Special “luxury car” rules limit deductions for business vehicles. Nevertheless, due to the TCJA, you can write off up to $20,200 for such a vehicle placed in service in 2023.

Qualified Retirement Plans

The new SECURE 2.0 law includes a number of provisions affecting employers with qualified retirement plans.

YEAR-END MOVE: Position your business to maximize available tax benefits and avoid potential problems. Consider the following key changes of particular interest.

• For 401(k) plans adopted after 2024, an employer must provide automatic enrollment to employees. Certain small companies and start-ups are exempt.
• Beginning in 2023, employers with 50 or fewer employees can qualify for a credit equal to 100% of their contributions to a new retirement plan, up to $1,000 per employee, phased out over five years. The 100% credit is reduced for a business with 51 to 100 employees. This tax break is in addition to an enhanced credit for plan start-up costs.
• Beginning in 2024, employers may automatically provide employees with emergency access to accounts of up to 3% of their salary, capped at $2,500.
• An employer may elect to make matching contributions to an employee’s retirement plan account based on student loan obligations, beginning in 2024.
• The new law shortens the eligibility requirement for part-time workers from three years to two years, beginning in 2023, among other modifications.
• Any catch-up contributions to 401(k) plans must be made to Roth-type accounts for employees earning more than $145,000 a year (indexed for inflation).

Tip: This last provision was initially scheduled to take effect in 2024, but a new IRS ruling just delayed it for two years to 2026.

Miscellaneous

• On July 22, 2023, Texas Governor Greg Abbott signed legislation increasing the amount of the total revenue exemption for the Texas franchise tax to $2.47 million effective January 1, 2024, and to be indexed for inflation.  Also eliminated would be the requirement for taxable entities that owe no franchise tax because their total revenue is equal to or below the no-tax-due threshold to file an annual “No Tax Due” report with the Comptroller.  However, these entities are still required to file the annual public information report.  Also, the combined filing requirements for affiliated groups in a unitary business must also be considered.
• The Corporate Transparency Act (CTA) was enacted into law on January 1, 2021, requiring certain new and existing companies to disclose certain information about their true primary owners (“beneficial owners”) to the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).  Any domestic reporting company created before January 1, 2024, must file this so called “BOI report” with the FinCEN before January 1, 2025.  Any domestic reporting company formed on or after January 1, 2024, must file within 30 calendar days of its formation date (or within 90 calendar days if formed during 2024).  Some notable exceptions to this new reporting requirement are:
  • Publicly traded companies registered with the SEC
  • Tax exempt entities
  • Large operating companies in the US (defined as more than 20 full-time employees, more than $5 million in U.S. gross receipts, and having a physical U.S. office)
• Income derived from cryptocurrency transactions is subject to tax and the 2023 draft tax forms for business entities, Forms 1120, 1120-S and 1065, include the following question “At any time during this tax year, did you (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? (See instructions).”  While buying cryptocurrency alone isn’t a taxable event, the sale of a cryptocurrency is, and you should keep track of all cryptocurrency transactions and consult your tax advisor regarding potential income tax implications of these transactions each year.
• Consider hiring workers from certain target groups eligible for the Work Opportunity Tax Credit (WOTC). Generally, the WOTC is 40% of first-year wages of up to $6,000, for a maximum $2,400 credit per qualified worker.
• The TCJA requires that any research and development costs incurred in 2022 or thereafter are required to be amortized ratably over five years rather than deducted in the year the costs are incurred (15 years for foreign research).
• Under the IRA, a start-up business can elect to use up to $500,000 of qualified research credits to offset payroll taxes instead of income taxes, if it has gross receipts of less than $5 million.
• If your business realizes a net operating loss (NOL) in 2023, it can no longer be carried back under current law, but the NOL may be carried forward indefinitely (subject to a limit of 80% of taxable income).
• Maximize the qualified business interest (QBI) deduction for pass-through entities and self-employed individuals. Note that special rules apply if you are in a “specified service trade or business” (SSTB).  Also, the QBI deduction is scheduled to sunset on December 31, 2025.
• If you pay year-end bonuses to employees in 2023, the amounts are generally deductible by the company and taxable to the employees in 2023. But a calendar-year company operating on the accrual basis may be able to deduct bonuses paid as late as March 15, 2024, on its 2023 return if the bonuses are not contingent upon any post year-end events.
• One of the last remaining provisions from COVID-related legislation is the employee retention credit (ERC).  While the employment period for which the credit can be claimed ended in 2021, the period for filing amended returns to claim the credit is still open.  Taxpayers should be very careful, however, since many tax promoters have been facilitating questionable claims for the credit and penalties may be imposed on the employer as a result.  Due to the proliferation of questionable claims, the IRS has placed a moratorium on processing ERC refund claims through the end of 2023 and has provided instructions for employers to withdraw unprocessed claims if the employer wishes to do so.
• If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $28,900. The luxury car limits do not apply to certain heavy-duty vehicles.  Also, the Inflation Reduction Act of 2022 provides a new $7,500 credit for the purchase of clean commercial vehicles after 2022 and an even higher credit amount ($40,000) for qualifying vehicles with a GVWR over 14,000 pounds.  Specific requirements apply, similar to the credit available for individuals, and see Commercial Clean Vehicle Credit | Internal Revenue Service (irs.gov) for additional details.
• Stock the shelves with routine supplies (especially if they are in high demand). If you buy the supplies in 2023, they are deductible this year even if they are not used until 2024.
• Keep records of collection efforts (e.g., phone calls, emails and letters) to prove debts are worthless. This may allow you to claim a bad debt deduction.

We Are Here to Help

Maxwell Locke & Ritter’s experienced tax professionals can help you with any questions you might have regarding the items above. We provide accounting and year-end tax planning services for businesses and business owners. Contact us today if you need assistance.