Tax Planning for Businesses
With tax year 2023 ending, we need to consider what can be done to help lower your tax bill for this year and next. With the uncertainty of pending legislation, here are some tax planning ideas for businesses.
Review your accounting method
Businesses typically use either an accrual method of accounting or the cash basis. Under an accrual method, income and expense is recognized when: 1) All events have occurred to deduct the cost or recognize the income and 2) the amount can be determined with reasonable accuracy. Under the cash basis, income is recognized when it is actually or constructively received, and expenses are generally deducted in the year they are paid. Many businesses were prohibited from using the cash basis of accounting due to restrictions on gross income levels or the required use of inventories. The Tax Cuts and Jobs Act of 2017 (TCJA) expanded the definition of who qualifies to use the cash basis of accounting. Businesses with average annual gross receipts (3-year average) under $29 million can now qualify to use the cash basis of accounting.
Cost segregation analysis
A cost segregation analysis is a commonly used strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded or remodeled any kind of real estate to accelerate depreciation deductions. When a property is purchased, not only does it include a building structure, but it also includes all its interior and exterior components. Many of those components fall into tax categories that can be written off faster than the building structure. A cost segregation analysis dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27 ½ or 39 years. The primary goal of a cost segregation analysis is to identify all property-related costs that can be depreciated over 5, 7 and 15 years.
Bonus depreciation
Bonus depreciation allows for the accelerated depreciation of capitalized assets with depreciable lives of 20 years or less. The allowable bonus depreciation is typically 80% (tax year 2023) of the cost of the property, except for certain passenger automobiles that are subject to dollar limits on a per vehicle basis. Placing bonus depreciation-eligible assets in service before year end can be an effective way to reduce your federal tax liability.
Caution: New York, and many other states, don’t accept bonus depreciation. Bonus depreciation claimed on the Federal return must be added back in full to NY taxable income, and the bonus depreciation-eligible property is depreciated over the normal recovery period.
Expensing business property (Section 179)
For 2023, the expensing limit is $1,160,000 and is generally available for most depreciable property (other than buildings) and off the shelf computer software.
The Section 179 phaseout limit for 2023 starts at $2.89 million.
Planning with year-end bonuses
If a business is having a successful year, consider making bonuses to employees. An accrual basis taxpayer can accrue bonuses and get a deduction in 2023 as long as bonuses are paid by March 15, 2024. Please note that bonuses accrued to owners do not qualify.
If an owner believes they are underpaid for estimated taxes, a year-end bonus paid by December 31, 2023 can be used to withhold additional federal and state taxes.
Another bonus strategy relates to an existing C corporation that is making an election to be treated as an S corporation. An existing C corporation that makes this election is subject to built-in-gains (BIG) tax for a 60-month period after electing S status. Any asset sold during the 60-month period that has a BIG attached is subject to C corporation tax rates. An accrued bonus to an owner that is paid in the following year is considered a built- in-loss that can be used to reduce BIG tax in the future.
Student loan payments benefit
Beginning in 2024, employers can match their employees’ student loan payments toward their retirement accounts (401(k), 403(b), SIMPLE IRA). For example, if an employee is putting 5% of their salary toward their student loans, an employer can match the 5% paid to student loans toward the employee’s retirement account. The employee does not have to contribute anything to their retirement account. Employees must have a retirement account set up with their employer and be making payments on their student loans to qualify for the benefit. Employees also must certify that they are making their student loan payments. The certification process may vary from company to company.
State Tax Issues
If your company sells products online, you will need to consider that states have the right to require online businesses with no physical presence in the state to register as a vendor and therefore collect sales tax. This was an additional tax revenue source for the states.
Each state has its own rules for establishing nexus.
Therefore, if your business has a physical presence or “nexus” in a state, you are typically required to collect applicable sales taxes from online customers in that state.
Other miscellaneous items
Consider moving income into 2023 from 2024 if you anticipate a small net operating loss this year. By creating a small amount of net income, a C corporation can base their 2024 estimated tax payments on the 2023 safe-harbor tax rather than calculating estimates on a quarterly basis.
If you have a passive activity with suspended losses, consider disposing of the activity to free up those losses.
These are just a few planning ideas to consider for 2023 or 2024 and are general in nature. If you have any questions or need further information, please contact your TBC advisor.