Year-End Tax Planning forBusinesses

Year-End Tax Planning for Businesses

John Blake, CPA, MBA

Between supply chain issues, rising inflation, and emerging from the COVID-19 pandemic, 2022 has been challenging for many businesses. In addition, there is some uncertainty around tax planning as the mid-term elections could play a vital role in the budgetreconciliation that will be due around the middle of December. However, now that the year is wrapping up, it's important to remember that despite the challenges, there's still some time left to consider some key end-of-year tax planning strategies, some of which we outline below.

The 15% Corporate Alternative Minimum Tax There's been a considerable buzz around the 15% corporate alternative minimum tax (AMT) going into effect in 2023 due to the Inflation Reduction Act of 2022 (IRA). If you own a business,you're likely wondering how the AMT will affect you.

The good news is that the AMT will only apply to your business if you have a net book income of over $1B. Considering that this income threshold does not apply to most companies, it likely will not apply to yours.

Of course, the midterm elections could impact how much tax your business pays next year. The Biden administration's "Green Book" 2023 budget includes a new proposal to increase the top corporate rate for C corporations from 21% to 28%. The stated reason for the tax increase is to help pay for the green goals outlined by the Biden administration. It would also go into effect starting on January 1, 2023. However, it remains to be seen whether this proposal will go into action next year or if additional changes will be made.

Defer New Invoices Until 2023 Where Possible Another hot topic right now is inflation. It’s no secret that we’re all living through an age with historically high inflation. As a result of these changes, the IRS has also updated the income tax brackets for 2023. If you want to take advantage of these new rates, then it might make the most sense to defer any new invoices until 2023.

Deferring new invoices will provide multiple benefits. Not only will that income likely be taxed less since 2023’s income thresholds will be higher, but you’ll also minimize your tax liability for the current year’s returns (2022). But, again, this is contingent upon what happens with the budget reconciliation near the end of the year.

Take Advantage of the Last Year of 100% Bonus Depreciation Did your business make any investments in capital assets in 2022? Then, you should work that into your end-of-year tax plans if you still need to.

Why? Because 2022 is the last year, your business can take advantage of 100% bonus depreciation for tax purposes. In 2023, it drops to only 80%.

So, what is bonus depreciation, and how can it benefit your business? In a nutshell, it is a tax break for businesses that allows them to deduct up to 100% of the purchase price of eligible assets. Considering that this fourth quarter of 2022 is the last chance you'll have to get the 100% bonus depreciation, it might be a good idea to make qualifying investments now if they make sense.

Maximize the Qualified Business Income Deduction Another expert tax tip for the end of 2022 is to consider maximizing your qualified business income deduction. A qualified business income (QBI) deduction allows taxpayers that receive income from passthrough entities to deduct up to 20% of their qualified business income when they file their annual tax returns. This deduction is available regardless of whether you itemize or take the standard deduction. Here is who will qualify for 2022: • Single filers: $170,050 • Joint Filers: $340,100

If your taxable income exceeds these figures, then the QBI may be limited depending on several factors, including the nature of your business.

Check to See If You Qualify for the Employee Retention Credit Under the CARES Act, your business might qualify for the Employee Retention Credit (ERC). The ERC is a refundable tax credit that could bring a business a maximum refund of $26,000 per employee if your company meets the gross receipts reduction or government shutdown requirements. While the ERC will no longer apply to new wages you pay out, you can still claim the credit retroactively on past paid wages. You have until July 31, 2023, to look back and determine if you qualify for the first potential quarter of eligibility.

Temporary 100% Deduction for Business Meal Expenses Under the Consolidated Appropriations Act, all restaurant meals are 100% deductible throughout 2022. Taking advantage of this deduction inthese final months is crucial because it will go back to 50% in 2023. To qualify for the 100% restaurant meal deduction, the following apply: • Have had a business owner or employee present at the meal • Meals must be from a restaurant for immediate consumption • Payment for the billing must be between December 31, 2020, and January 1, 2023 • The meal isn't extravagant

This deduction is a great business opportunity that you can use to help foster relationships with new or existing business partners.

Understand the Pass-Through Entity Tax Program If your business is considered a qualifying pass-through entity, you can pay an entity-level state tax on income in about 31 states. The tax is paid directly by the pass-through entity to the state. This pass-through tax is optional and requires an election to participate, so you may wonder what the incentive is to pay this tax. The tax is considered a business expense and would lower the individual’s federal taxable income. In addition, the individual would get a credit for the taxes paid on their state income tax return.

Know the R&D Deduction Rule Changes for 2023 The IRA and Tax Cuts and Jobs Act (TCJA) both impact the research & development credit for businesses. Before the TCJA, a company could immediately deduct 100% of the total cost of an R&D investment. Beginning January 1, 2022, companies will be expected to deduct their investment costs over five years instead.

The good news is that the IRA will double the maximum R&D credit you can use to offset your payroll taxes. Before, the amount was capped at $250,000, but now the maximum will be $500,000. This rule will go into effect on January 1, 2023, and generally applies to start-up companies.

1% Excise Tax on Corporate Stock Buybacks Here's another tax change you'll want to be aware of as we head toward the end of 2022. Starting next year, stock buybacks by covered corporations will be subject to an excise tax of 1%, but this new change only applies to buybacks after December 31, 2022.

While the mid-term election results might result in some tax changes, and the inflation rate could also alter things, year-end tax planning is imperative to the success of your business. McCarthy & Company’s Tax Services Group has extensive experience helping businesses with their endof-year tax planning, and we can help you, too. For more information, or if you have questions about the material outlined above,please contact us.

About the Author John Blake, CPA, MBA, is a tax partner in the firm’s New Jersey Office. Considered a valued advisor, John is passionate about helping entrepreneurs, closely held businesses, middle market companies, and individuals make more money by delivering comprehensive financial management services. John focuses on a company’s key performance indicators to determine where clients should focus their attention so that minor issues do not become significant challenges.Contact John at (732) 341-3893or john.blake@mccarthy.cpa.

John Blake, CPA, MBA