Year End Tax Tips For 2023

With year-end approaching, it is time to start thinking about moves that may help lower your business taxes for this year and next. If you are seeking ways to both save some dollars by the end of 2023 and kick off 2024 with your best tax plan in place, we have a list of items to consider, so you can act now.  In an effort to help ease the process, we have detailed some items to consider and ways to maximize your tax outcomes. 

Inside, you will find details to optimize your tax outcomes pertaining to the following:

• Qualified business income deduction
• Entity structure considerations
• Cash versus accrual basis accounting considerations
• Timing of employee bonuses whether cash or accrual basis accounting is used
• Retirement savings opportunities
• Capital expenditures
• State income, franchise, and gross receipts tax considerations
• Entity or ownership changes

Why a Meeting with Accountfully’s Tax Team is a Good First Step

If you have read the first paragraph and already feel overwhelmed, that may be your first clue it is time to consult the pros and let them (us) guide you. Whether or not all of these tax-specific items resonate with your business, it is important to make sure you have covered all of your bases to maximize every option.  The tax team stays current with the tax landscape (it is our thing, after all).  We are in tune with the latest news, laws, and intricacies within small business tax. When we meet, we can take all of that knowledge and quickly narrow down specific actions to take and tailor a plan that makes the most sense for your business. 

In the meantime, please review the following list of items to consider, and contact us at any time to schedule a planning meeting with our tax team.  We are happy to advise you on which tax-saving moves might be beneficial.

Are You a Sole-Proprietor, S-Corporation Shareholder, and/or in a Partnership (or an LLC Taxed as a Partnership)?  

If so, you may qualify for the 20% Qualified Business Income (QBI) Deduction.  This applies to Sole Proprietors, S-Corporation Shareholders, and partners in a partnership (or LLC taxed as a partnership).  

This deduction means:

• Taxpayers other than C-corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2023, if taxable income exceeds $364,200 for a married couple filing jointly, ($182,100 for all others) the deduction may be limited based on whether the taxpayer is engaged in a service-type trade, or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. 

• Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for 2023. 

• Depending on their business model, taxpayers also may be able to increase the deduction by increasing W-2 wages before year-end. 

The rules are quite complex, please reach out to us so we can advise on your particular situation.

Does Your Entity Structure Still Make Sense?

Regular, ongoing involvement with tax and the ways you conduct business can result in better tax outcomes.  Your business may not be the same as when you started; profitability-wise, or structurally.  It may be time to reconsider its entity structure to see if it still aligns with your short and long-term goals.  For example, a single-owner LLC or sole proprietor may benefit from making a potential S-Corporation election depending on its profitability levels. 

Does Your Accounting Method Still Make Sense?

Most businesses start out using cash versus accrual accounting methods.  This is because cash method taxpayers may find it a lot easier to shift income to make it work for tax outcomes at year-end.  For example, holding off billings until the next year, or by accelerating expenses by paying bills early or by making certain pre-payments.  More small businesses are able to continue using this method of accounting than were allowed to do so in earlier years, so this may be something to consider.  In recent years, average annual gross receipts were capped at $1 million per year to be eligible for the cash method.  The threshold is now much higher.  

If you would like to continue to be considered a small business and use cash-based accounting, you can do so by satisfying (among other things) a gross receipts test. If during a three-year testing period, average annual gross receipts do not exceed $29 million, you may qualify for 2023.

Timing of Employee Bonuses That Can Apply to Companies Using Cash or Accrual Basis Methods

Year-end bonuses can be timed for maximum tax effect by both cash and accrual-basis employers. Here are a few examples of how you can plan bonuses whether you use cash or accrual basis accounting:

▶︎ Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. 

▶︎ Accrual basis employers deduct bonuses in the accrual year when all events related to them are established with reasonable certainty. 

• The bonus must be paid within two-and-a-half months after the end of the employer's tax year for the deduction to be allowed in the earlier accrual year. 
• Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year-end to set the payment date later than the two-and-a-half-month window, or
• change the terms of the bonus plan so that the bonus amount is not determinable at year-end.

Retirement Savings Opportunities

A valuable tool to both reduce your current income tax obligations and start saving for retirement is company-sponsored retirement plans. 

There are many types of retirement plan options that can be advantageous, including:

• Simplified Employee Pension plans (SEP)
• SIMPLE 401(k)
• Solo 401(k)
• 401(k) with a company match and discretionary profit-sharing option.

Capital Expenditures

Now is a great time to make the call on those big expenditures, especially those that qualify for the liberalized business property expensing option.  Details are listed below, but large purchases made by the end of 2023 can be deducted as you roll into 2024, even when you start using them.  For tax years beginning in 2023, the expensing limit is $1,160,000, and the investment ceiling limit is $2,890,000. Expensing options are generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building, (but not for its enlargement, elevators, escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. This benefit is only available for businesses showing taxable profits.

How will making these large investments by the end of the year benefit you?

• Deduct all or most of your investment. The generous dollar ceilings mean that many small and medium-sized businesses that make timely purchases will be able to deduct most if not all their outlays for machinery and equipment. 
• Use it now, and continue to see the deduction into 2024.  The expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of 2023, rather than at the beginning of 2024, can result in a full expensing deduction for 2023.
• You can still deduct used equipment and use it this year.  Businesses also can claim an 80% bonus first-year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year and for qualified improvement property, described above as related to the expensing deduction. The 80% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 80% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2023. (In 2024, the available write-off will decline to 60%.) This option is available even if your business is operating at a loss.

Research and Development Expenditures 

It is time to let your experimentation and product improvement pay off; whether that R&D is occurring domestically or internationally. Some businesses may be eligible for the Research and Development tax credit, which is a dollar-for-dollar reduction in a business’s income tax liability (or payroll tax liability for some eligible businesses). You can read more about the R&D tax and see if you are eligible, here. 

As of 2022, the way research and experimental activities are treated for tax purposes has changed, and you may need to consider how your business can leverage these changes. For tax years prior to 2022, these expenditures were deductible as incurred under a business’s method of accounting. For tax years after 2021, these expenditures are now required to be capitalized for federal income tax purposes.  

Some details to note are: 

• Domestic research is amortizable over a five-year period.
• Research performed outside of the United States is amortizable over a 15-year period. 
• The amortization period begins July 1^st of each year so businesses are effectively entitled to a tax deduction of only one-tenth of their current year's research expenditures (one-thirtieth for foreign expenditures). 
• For some businesses operating at a loss, this may lead to unexpected surprises after accounting for these expenditures. 

State Income, Franchise, and Gross Receipts Taxes:  Are You Compliant?

If you sell products that are housed in multiple states or hire remote employees and pay taxes in states outside of your primary business location, pay attention.  You will need to ensure you are meeting your out-of-state obligations before the year ends.  In most states, hiring employees in a particular state not only requires the business to register for payroll tax withholdings, unemployment insurance, and potentially sales tax; but it also opens up the business to income tax filing requirements in that state.  As we head into the end of the year, it is a great time to evaluate your presence in different states to ensure you are meeting your compliance obligations. We can review your individual situation and advise on any potential filing requirements. 

State Income, Franchise, and Gross Receipts Taxes:  Have You Made The Appropriate Election?

Have you made the annual election that applies to your business situation?  Did you even know one existed?  Due to the current $10,000 state and local tax deduction limitation for individuals, many states throughout the country have passed laws allowing S-Corporations and Partnerships (or LLCs taxed as partnerships) to elect to pay the state income taxes from business profits on behalf of their shareholders or partners. Most states require an annual election to be made to receive this treatment. By making the election, the business entity (and not the individual) is allowed to deduct the state taxes paid as a business expense, not subject to the $10,000 limitation. By doing so, each shareholder or partner’s share of the business taxable income is decreased; effectively circumventing this limitation. Each state has different rules. We can help advise on whether this would be beneficial for you.

Next Steps

If you made it this far, good job!  We covered just some of the year-end steps that can be taken to minimize your tax liability and get your planning off on the path to future success.  We hope you were able to discern which opportunities apply to you, but if you need help translating all of the info, we are here.  Every business has its own nuances that may be best looked at from a professional tax accountant’s perspective.  Your friendly Accountfully tax team is eager to learn more about your business and tailor the plan that will work best for you.  Feel free to get in touch anytime.

We hope this information helps, and we look forward to supporting you in your tax journey.