2023 Year-End Tax Planning for Businesses

 

2023 has been a relatively quiet year from both a tax standpoint, and an overall economic standpoint for the United States. After 2022 saw historically high inflation as the economy rebounded from the impacts of the pandemic, inflation has cooled somewhat, and it appears that the chances of a recession have abated. The U.S has not seen any major tax legislation. The IRS has been busy issuing guidance implementing major pieces of 2022 tax legislation. However, much of the legislation, and the ensuing guidance, is very narrowly applicable, largely impacting green energy investment and retirement planning and saving. For the most part, 2022 legislation was not broadly applicable to a large swath of taxpayers, which means stability. Tried-and-true year-end strategies from years past. While there are always new strategies to consider, and indeed there are some changes from recent legislation that are in effect for 2023, the simple tactics of deferring income an increasing current deductions will be the order of the day for 2023.

This article provides a checklist of areas where, with proper planning, businesses may be able to reduce or defer taxes over time. Unless otherwise noted, the information contained in this article is based on enacted tax laws and policies as of the publication date and is subject to change based on future legislative or tax policy changes.

Planning Tips

• Review your balance sheet to ensure that you have reconciled assets and liabilities to supporting documentation and have recorded all entries for year. Compare your 2023 profit and loss to 2022 to ensure that you have consistently recorded your income and expenses. You will also be able to easily identify fluctuations in accounts.
• Have you reviewed the nexus rules in every state in which you have property, employees (including remote) or sales to determine whether there is a tax obligation?
• Consider the timing of asset sales and how taxable income will be affected. Purchasing qualifying property and equipment before the end of 2023 to take advantage of the 80% bonus depreciation provisions (will decrease by 20% each year until is sunsets in 2027) and the Section 179 expensing rules.
• Consider changes of many of the current energy-related tax credits. There are several federal tax benefits available for investments to promote energy efficiency and sustainability initiatives.
• Review quarterly estimated tax payments for owners of flow-through entities to determine if an adjustment should be made to the 4th quarter tax payment.

New For 2023

• Business-related vehicle expenses can be deducted using the mileage-rate method (65.5 cents per mile driven from January 1 to December 31, 2023).
• For 2023, most business meal expenses, including those incurred while traveling on business, have remained 50% deductible. The deduction of 100% for food and beverages provided by a restaurant is no longer available. However, food for company holiday parties, food and beverages given to the public, and dinner for employees working late at the office are 100% deductible.
• The SECURE Act  increases the Section 45E credit for all or a portion of employer contribution to small employer pensions for the first five employer tax years, starting in 2023. The credit for employer contributions is capped at $1,000 per employee. The full credit is available to employers with 50 or fewer employees and is phased out completely for employers with more than 100 employees.
• The rules around how to claim a net operating loss have changed for 2023. A net operating loss occurs when your deductions exceed your gross income. As a general rule, you can carry the loss forward to offset income in later years. You cannot offset more than 80% of your taxable income.
• Through a temporary suspension of Tax Cuts and Jobs Act rules in 2019 and 2020, businesses could carry net operating losses back five years or carry them forward indefinitely. However, the suspension has ended. Taxpayers cannot deduct losses of more than $540,000 per year if married filing jointly or $270,000 if single. This applies to all business income and losses, including Schedule C and pass-through-entity income and losses. You can carry forward losses in excess of these amounts to lower your taxable income in future years.

In addition, W-2 wages can no longer be used to offset the business losses. Spousal income is taxed separately and may result in a tax bill even if the business losses are greater than the spousal income.

• The charitable contribution rule that allowed C corporations and individuals to deduct a greater percentage of their income for charitable contributions is no longer in force for the 2023 tax year.
• The IRS announced a delay of the new $600 Form 1099-K reporting threshold for third party settlement organizations for calendar year 2023. As the IRS continues to work to implement the new law, the agency will treat 2023 as an additional transition year. This will reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn’t expect one and may not have a tax obligation. As a result, reporting will not be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023. Given the complexity of the new provision, the large number of individual taxpayers affected and the need for stakeholders to have certainty with enough lead time, the IRS is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan (ARP).
• The tax reform law created a significant deduction for both pass-through and corporate entities. Pass-through businesses are small businesses structured as S corporations, limited liability companies (LLCs), sole proprietorships and partnerships. Pass-throughs make up approximately 95 percent of U.S. businesses. The law now provides a 20 percent deduction for those businesses. The 2022 deduction phased out at taxable income levels between $170,050 and $220,050 (between $340,100 and $440,100 for joint filers), and the 2023 phase-out levels will be adjusted for inflation. This deduction is set to expire at the start of 2027

Filing Deadlines

• The filing deadline for all federal W-2s is January 31st. This is for both employee and agency copies, and whether filing paper or electronic returns.
• Forms 1097, 1098, 1099 (except a Form 1099-NEC reporting nonemployee compensation), 3921, 3922 or W-2G have a filing due date of February 28, 2023 or if filing electronically, have an extended filing due date with the IRS of March 31, 2023. However, the due date for giving the recipient these forms generally remains January 31st.
• January 31, 2023 – Deadline to supply each 1099 vendor (to whom you paid $600 or more) with a completed Form 1099-MISC, or Form 1099-NEC. The penalty for failing to file Form 1099s when required could be as much as $580 per statement.
  • Before paying a new vendor, request they complete a Form W-9 (if they are a U.S. business performing services in the U.S.). If you pay a vendor outside the U.S., you may need to request a W-8 series Form.
• 2023 tax returns and payments are due by midnight on April 18, 2024, for sole Proprietorship, household employers and C corporations. For S corporations and      partnerships, taxes are due March 15, 2024.

Expenses and Deductions

Planning for income, expenses, asset acquisition and depreciation can help reduce your business tax burden.

• Qualified Business Income (QBI) Deduction: For tax years 2018 – 2025, individuals, estates and trusts may deduct up to 20% of their qualified business income from sole proprietorships (including farms) and pass-through entities. Limitations apply based on the type of business, wages, and assets in the business and other factors.
• S-corporation owners need to ensure their salaries meet the reasonable compensation requirements. Not having a reasonable salary in place can affect the QBI deduction.
• Review asset additions: Assets which will be used within a year or are under $2,500 for each item (if you have a capitalization policy in place stating this), can be expensed and do not need to be recorded under fixed assets. This will save time reclassifying assets for tax return preparation and avoid unnecessarily tracking assets year to year.
• Disposition of assets: Losses related to worthless, damaged or abandoned property can sometimes generate ordinary losses for specific assets.
• Section 179 qualified real property: §179 qualified real property is qualified improvement property plus roofs, heating, ventilation and air conditioning property, fire protection, and alarm and security systems. These items now qualify for §179 expensing if all conditions are met. The maximum amount you can elect to deduct for most §179 property you placed in service in the tax year 2023 is $1,160,000. This limit is reduced by the amount by which the cost of §179 property placed in service during the tax year exceeds $2,890,000 for 2023.
• Businesses can either: 1) depreciate company vehicles and claim actual vehicle expenses such as gas, repairs, & maintenance or 2) claim the standard mileage rate.
• Ensure a reimbursement policy is in place and reimbursements are being made
• If you have sales or are performing services outside your home state, consider if the sales can be a deduction on your Washington State B&O return. Also, consider if you have income tax or sales tax nexus in the states you are selling to and/or performing services in. Each state has different rules and needs to be reviewed separately.
• If you use any portion of your home for business use, you may be eligible to deduct apportioned expenses.
• Small business employers with 25 or fewer full-time employees may qualify for the Small Business Health Care Tax Credit to help pay for employees’ health insurance.
• The Work Opportunity Tax Credit is available for employers who hire certain targeted groups and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. The Consolidated Appropriations Act, 2021 authorized the extension of the WOTC until December 31, 2025.
• Online Tax Planning Guide

 

Please contact your VSH tax advisor to discuss further.