2023 Year-End Tax Planning for Businesses
As businesses work to rebound after a challenging few years, strategic year-end tax planning has never been more important. With 2024 around the corner, it’s essential for businesses to be prepared as we approach scheduled changes to tax legislation and start to see several deductions expiring or phasing out.
In this article, we’ll highlight key planning opportunities to make the upcoming filing season as informed and streamlined as possible for you and your business.
California Tax Update
Effective beginning in 2023, the California Franchise Tax Board (FTB) is now requiring partnerships to conform to California’s tax basis method for reporting capital accounts on Schedule K-1, Forms 565 and 568.
With the passage of the IRS tax capital reporting requirements in 2020, some taxpayers may have already completed a large portion of the California tax basis reporting, given California conforms to much of the federal code; however, there will be differences in the federal and California tax code that may require reporting adjustments. Consider allocating extra time to gather information and perform the necessary calculations to prepare for this change.
Bonus Depreciation and Section 179
Bonus depreciation has long incentivized businesses to invest in new equipment and property as a way to immediately deduct eligible asset expenses in a single tax year rather than having to depreciate the cost over the course of several years.
Beginning on January 1, 2023, bonus depreciation is phasing down from 100 percent to 80 percent of qualifying property placed in service before January 1, 2024. Over the next four years, it will continue to be reduced by 20 percent each year and completely phase out on January 1, 2027, unless Congress acts.
Despite the phase-out of bonus depreciation, businesses may still qualify for Section 179 deductions, which should remain fully available in upcoming tax years. In 2023, the IRS limits Section 179 deductions to $1.16 million for purchases up to $2.89 million, and gradually phases out once total purchase prices reach $4.05 million for the year.
If your business is considering large-ticket capital purchases, it’s important to proactively plan the timing of purchases to ensure that tax-efficient strategies are in place. Both methods of accelerated depreciation can be used for federal tax purposes in the same tax year on the same assets, along with regular depreciation over the asset’s useful life.
Please note that California does not conform to bonus depreciation, and Section 179 expensing is limited to a $25,000 deduction and a $200,000 threshold amount for property placed in service in the current year. This means that California businesses will need to addback these federal deductions when calculating their state tax.
Section 174 R&E Expenditures
While there’s a number of bills moving through Congress to retroactively restore Section 174 to its pre-2022 status, there’s been no concrete timeline as to when businesses may be able to immediately deduct research and experimental (R&E) expenditures again.
In the interim, the IRS recently issued Notice 2023-63 addressing questions on how to implement the new capitalization and amortization rules under Section 174. The initial guidance covers seven areas that drill down into topics such as what expenses are treated as R&E, what costs are excluded, what activities constitute software development, how to handle costs incurred for research under contract, and how to apply rules for cost sharing transaction payments, among others.
Unless a business is already in compliance with the Notice, the new guidelines may prompt some businesses to file for a change in accounting method; however, the IRS expects to issue final guidance allowing businesses to use the automatic accounting method change procedure to fully comply with the rules contained in the notice.
Corporate Transparency Act Reporting Requirements
Millions of privately held businesses will need to plan for new reporting requirements effective on January 1, 2024 as a result of a new anti-crime law that aims to prevent the concealment of illicit money through shell and front companies.
The new Corporate Transparency Act requires all private reporting companies to file a Beneficial Ownership Information Report with the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) in order to increase transparency on beneficial ownership information.
Businesses have one year to comply with the new regulation or may face fines up to $500 per day for noncompliance. We recommend that you consult with your business attorney to determine if your business must file, and to assist with the FinCEN filings.
Inflation Reduction Act
Beginning on January 1, 2023, key business changes under the Inflation Reduction Act went into effect, including:
- 15% alternative minimum tax (AMT) on corporations with over $1 billion in revenue
- 1% excise tax on corporate share buybacks
- Two-year extension of limitation on excess business losses
- Research and development credit increase
- Clean energy and production tax credits
It’s important to consider how these changes could impact your business now through the end of the year, and into future tax years. Some calculations may be complex and may require careful planning consideration, so you’re encouraged to work with your advisor to craft a plan.
Business-Related Meal Deduction
In an effort to boost restaurant sales in the midst of COVID, businesses were able deduct 100 percent of food and beverage expenses in 2021 and 2022. However, this temporary deduction expired in 2023, reverting the majority of business meal expenses back to the way they were prior to 2021.
For 2023, most business meals are 50 percent deductible. These include business meals with clients, food and snacks for the office, and meals while traveling for work or at a conference. Luckily, some business meal expenses are still considered 100 percent deductible, such as food for company parties, food provided to the public, and even meals provided to employees who stay late at the office. And while nearly all entertainment expenses are no longer deductible for federal purposes, there are always exceptions to the rule, so connect with an advisor to learn more about what specific entertainment costs can be deducted.
Timing of Income and Deductions
One of the most tried-and-true year-end tax strategies—deferring or accelerating income into the current or next tax year—presents an opportunity to time income and deductions to your tax advantage. If you anticipate being taxed at a higher tax rate next year, you may consider accelerating income and deferring deductible expenses so that you can save money over a two-year period. Businesses that experienced a financially challenging year could find this option the best strategy.
On the other hand, depending on your situation and accounting method, your business may choose to do the opposite—to defer income into next year by postponing billing for products or services at year end with the cash method of accounting or choose to delay shipping products or delivering services through the accrual method. It could also mean postponing the sale of a capital asset until a year later when income is lower.
Another key strategy is to accelerate deductions, rather than spreading them out over several years. With 80 percent bonus depreciation only on the table for a few more weeks, businesses may want to consider this incentive before it phases down to 60 percent in 2024.
Timing of income and deductions should be part of most business’ strategic year-end tax planning. If you’re not sure on the best approach, connect with our advisors to review your options.
Tax planning is an essential part of running a successful business, and oftentimes can require year-round attention. The expiring tax provisions, sunsetting deductions, and exhaustive list of tax developments requires business owners to evaluate their plans and reposition their goals before closing out the calendar year.
If you’d like to discuss your business’ year-end tax planning opportunities, contact your BPW advisor to discuss your situation. We’re here to help.