November 29, 2023

By: Steven Dumstorff and Chris Nelson

The fall and year end always seem to come faster and faster each year.  While there are always new strategies to consider, the usual tactics of deferring income and increasing current deductions still apply for 2023.  Preserving equity and working capital in the form of reduced tax outflows frees up cash for business owners to use for other business and personal needs.   Below are a few year-end tax strategies to consider.

 Depreciation and expensing

The Tax Cuts and Jobs Act provided very generous depreciation and expensing limitations. The bonus depreciation was 100-percent in 2022.  Businesses may want to take advantage of 80-percent first-year depreciation on machinery and equipment purchased during 2023.  This percentage decreases each year over the next three tax years.  Additionally, Code Sec. 179 expensing has an investment limitation of $2,890,000 for 2023, with a dollar limitation of $1,160,000.

Pass-Through Entity Elections

The Tax Cuts and Jobs Act limited the amount of an individual taxpayer’s itemized deductions for state and local sales, income, and property taxes (referred to as “SALT”) to no more than $10,000 per year through 2025. Starting in 2018, states began enacting workarounds for state residents who are owners of S corporations, partnerships, and other pass-through entities. In its Notice 2020-75, the IRS agreed that pass-through entities may claim federal tax deductions for state taxes paid under workaround laws that shift the state income tax burden from the individual owners to the business entity. The essential idea of state workarounds is to impose elective entity-level taxes while reducing the related owner-level taxes. Since 2021, many states including Illinois, Missouri, and Wisconsin have enacted some type of pass-through entity election as a workaround to SALT limitation.  Making these elections can provide a tax deduction for business income even though these are limited as an itemized deduction.  These rules vary by state so before making the elections it is best to research your state impact.

Retirement Plans

Many of the provisions of the SECURE 2.0 Act do not take effect until after 2023. However, one change that applies to employers in 2023 is the expansion of the credit for smaller employers to start a retirement plan for employees. Effective for tax years beginning after 2022, the amount of the credit is increased to 100 percent of startup costs for employers with 50 or fewer employees, and an additional credit for contributions is added for the first five years of a plan’s existence.  Implementation and/or enhancement of qualified retirement plans can provide a meaningful source of funds for employees and business owners in their retirement years while reducing income tax and payroll tax costs along the way.

 Bracket Utilization

While many business owners may be focused on deferring taxable income to preserve working capital for other needs, a multi-year perspective on reducing overall tax burdens also involves taking advantage of low tax brackets where possible.  Roth IRA and Roth 401k conversions are important tactics not to overlook if low tax brackets are available.  If expectations are high for anticipated 2024 income levels with higher tax brackets that go along with it, 2023 could be a low bracket year to land some taxable income that would otherwise be exposed to a higher tax rate.

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In addition to these year-end planning issues, the usual year-end planning strategies also still apply, such as managing gains and losses from taxable investments, considering postponing income and accelerating deductions, maximizing retirement contributions and charitable planning. There is no one size fits all for tax planning and any strategy may have unintended consequences if the taxpayer’s situation is not evaluated holistically considering the changing landscape. Please call our office to discuss all your options.