It may be December already, but calendar year-end business owners still have time to consider some tax planning strategies that can be made by the end of the year. The Inflation Reduction Act (IRA) was the only significant tax legislation in 2022, but many provisions aren’t effective until 2023. The Taxpayer Cuts and Jobs Act (TCJA) enacted in 2017 still provides some significant tax savings opportunities, although some of these provisions are phasing out soon.
Each year, business owners should review their methods of accounting for tax purposes, their retirement plan options, available credits and their tax structures. However, these last-minute considerations could save your business significant 2022 tax dollars.
1. Election to Expense (Section 179 expense)
Needed fixed asset purchases placed in service by year-end may be taken as an expense in 2022 rather than depreciated over the life of the asset. The Section 179 expense allows businesses to expense up to $1,080,000 of qualifying asset acquisitions, such as equipment, computers, off-the-shelf software, and furniture & fixtures. Business vehicles are also eligible but certain rules apply for some vehicles such as qualifying SUVs where the expense is limited to $25,000. New York State (NYS) follows the federal rules for the Section 179 expense, except no expense is allowed for qualifying SUV purchases.
The Section 179 expense is limited to taxable income (with the excess carried over to a year with income) so business owners should estimate their taxable income to see how much they can expense. A dollar-for-dollar phase out of the election to expense occurs when qualifying purchases exceed $2,700,000.
2. Bonus Depreciation
The bonus depreciation rules were enhanced with the enactment of the TCJA in 2017 which expanded qualifying purchases to include used assets and increased the expensing percentage to 100% from 50% for assets purchased after September 27, 2017. However, beginning in 2023, the 100% election begins to be phaseout 20% per year until it is eliminated in 2027.
Like the Section 179 expense, business owners can expense the cost of qualifying fixed asset acquisitions but are not limited to a fixed dollar amount or to taxable income. One disadvantage is that NYS does not recognize bonus depreciation and the qualifying assets must be depreciated over the life of the asset, typically using MACRS depreciation rules.
3. Interest Limitation (163(j) limitation)
The interest limitation for large businesses (those with average gross receipts over the prior 3 years of more than $27,000,000) was enacted in the TCJA and effective beginning in 2018. Interest is limited to the sum of business interest income, 30% of adjusted taxable income (ATI) and floor plan finance interest. Up to 2021, ATI was calculated by adding back the depreciation and amortization taken for tax purposes. Beginning in 2022, this add back is disallowed which reduces ATI and in turn, reduces the amount of interest that can be deducted. Large business owners need to be mindful of this new calculation for the interest limitation as it will impact them more significantly than in the past.
4. Pass-Through Business Income Deduction (Section 199A deduction)
Another significant tax deduction introduced in the TCJA was the Section 199A deduction. This deduction continues to benefit pass-through businesses including sole proprietorships, partnerships and S corporations. This deduction allows the owners to deduct 20% of their share of business income. Qualifying businesses are categorized as specified service businesses (SSB) and qualified trade or businesses (QTB).
SSBs, such as legal and accounting services qualify if the taxable income of the owner is under $170,050 (single filing status) and $340,100 (joint filing status). Therefore, managing taxable income is essential to take advantage of the 20% deduction. QTBs are still allowed the 20% deduction even if income is over these amounts. QTB owners are then limited by their number of qualifying wages and property basis. These calculations are important to allow QTB owners to take advantage of the deduction. Planning opportunities arise here by paying enough wages and/or owning enough qualified property at year end to maximize the deduction. In additions, owners should consider the need for and/or amount of bonus payments to themselves which would decrease the amount of qualifying income from the QTB.
5. Wealth Transfer with Business Interests
Business owners should have wealth transfer strategies in place, especially owners of family-owned businesses. With the lifetime gifting tax exemption at an all-time high, their year-end gifting plans should be reviewed. The annual gift exclusion is up to $16,000 per person, which means an individual can give $16,000 to every donee gift tax free. In addition, the individual can gift up to $12,060,000 (2022 cumulative amount) during their lifetime by using their gift tax exemption. This amount increases to $12,920,000 in 2023 due to the inflation adjustment but is scheduled to go down to $5 million in 2026. NYS does not have a gift tax, but gifts made 3 years prior to death are pulled back into the individual’s estate. Now is the time to take advantage of this wealth transfer strategy by not only gifting tax free but by removing future appreciate from the owner’s estate. Owners can use several strategies to gift business interests and should consult their estate and gift advisors.
The IRA is also an important consideration for your business. Some business owners may see an increase in demand for their services because of the new clean energy incentives in the IRA. New clean commercial vehicle tax credits, enhanced energy efficient commercial building incentives and a new credit for electric vehicle charging stations are only a few of the provisions in the IRA that business owners can take advantage of in 2023 but check the rules for some 2022 applicability.
Discussing these considerations with your tax advisors is crucial. Time is of the essence to put some of these strategies into play.
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This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.