With the election behind us and the holiday season in full swing, you may not be thinking about taxes. But you still have time to take proactive steps to reduce your federal income tax liability for 2024. Here are five last-minute tax planning strategies to consider before year end.
Important: Many Tax Cuts and Jobs Act (TCJA) provisions that affect individuals — such as the doubled standard deduction and lower individual tax rates — are scheduled to expire at the end of 2025, absent congressional action. However, Republican control of the White House and Congress makes an extension or even an expansion of many TCJA provisions likely.
1. Timing Income and Expenses
Suppose you don’t expect to be in a higher tax bracket next year. In that case, the traditional tax reduction strategy is to defer taxable income into the next year and accelerate deductible expenses into the current year. For example, you could ask your employer to pay your bonus in January, and you can prepay deductible January expenses before year end.
This strategy will reduce your taxable income, which also positions you to make the most of tax breaks that phase out based on income. Examples include the IRA contribution deduction, child tax credits and education tax credits.
Deferring income can also help high-income individuals avoid or minimize the 3.8% net investment income tax (NIIT). The NIIT kicks in at the following modified adjusted gross income (MAGI) levels:
$200,000 for single and head-of-household filers,
$250,000 for married couples who file jointly, and
$125,000 for married couples who file separately.
However, if you expect to be in a higher tax bracket in 2025, you might want to consider the reverse strategy. This might be the case if you switch to a higher-paying job, start a side business, or plan to sell your business or significant investments for a gain in 2025. In these situations, it might make more sense to accelerate taxable income into the current year and defer deductible expenses in the next tax year. Maximizing tax income for 2024 will allow more income to be taxed at your current year’s lower rate. And deferring expenses will make the deductions more valuable, because deductions save more tax when you’re subject to a higher tax rate.
2. Bunching Itemized Deductions
The TCJA nearly doubled the standard deduction, causing fewer people to itemize deductions. For 2024, the inflation-adjusted standard deductions are:
$14,600 for single filers and married couples who file separately,
$21,900 for heads of households, and
$29,200 for married couples who file jointly.
If you’re near the cutoff for itemizing deductions for 2024, you can “bunch” certain expenses to qualify for itemized deductions. This refers to timing deductible expenses to exceed the standard deduction threshold in a specific tax year. Such expenses include:
Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI),
Mortgage interest,
Investment interest,
State and local taxes,
Casualty and theft losses from a federally declared disaster, and
Charitable contributions.
For instance, before the end of the year, you could schedule elective medical or dental procedures with uninsured costs, prepay property taxes due next year, and make charitable contributions for both 2024 and 2025.
Important: Under the TCJA, itemized deductions for state and local taxes are limited to $10,000 annually. Absent congressional action, this limit is scheduled to expire after 2025. During the campaign, President-Elect Donald Trump proposed increasing or eliminating it.
3. Leveraging Charitable Giving
Regular donations of cash or personal property aren’t the only way charitable giving can help you trim your tax bill. There are other options to boost itemized deductions for charitable contributions. For example, consider donating appreciated assets you’ve held for at least one year. This allows you to avoid capital gains tax and, if applicable, the NIIT on the appreciation. Plus, you can deduct the fair market value of donated stocks and the cost basis of nonstock donations (subject to AGI limits).
A qualified charitable distribution (QCD) won’t count toward your charitable contribution deduction, but it’s still worth considering. After age 70½, you can make a QCD of up to $105,000 for 2024 from a retirement account with required minimum distributions (RMDs). The distribution is treated as an RMD from the account and is excluded from your taxable income. For 2024, you also can make a one-time QCD of up to $53,000 to a “split-interest” entity, meaning a charitable gift annuity or a charitable remainder trust. (Both QCD limits are adjusted annually for inflation.)
4. Converting Traditional IRAs to Roth IRAs
Despite a strong stock market in 2024, executing a Roth conversion is still advisable, especially if you expect continued appreciation in the future. The main downside is that you must pay income taxes now on the converted amount. A conversion can also result in a higher taxable income for the year of the conversion, which can affect tax breaks that phase out based on AGI or MAGI.
However, the long-term benefits often outweigh the tax costs. Roth IRAs don’t come with RMD obligations, and the funds appreciate tax-free. Qualified Roth IRA withdrawals are also federal-income-tax-free. A qualified Roth withdrawal is one taken after meeting two requirements:
1. You’ve had at least one Roth IRA open for over five years, and
2. You’ve reached age 59½, become disabled or died.
This can be particularly advantageous if you’ll be subject to higher tax rates in retirement — a development that surprises many retirees. You can also withdraw funds from a Roth account for the following purposes without incurring taxes or penalties:
A first-time home purchase (subject to a $10,000 limit),
Qualified birth or adoption expenses (subject to a $5,000 limit), and
Qualified higher education expenses (with no limit).
Additionally, Roth IRAs can be a beneficial estate planning tool. Why? Because you’re not required to take RMDs, you can leave the account untouched during your lifetime and then pass on the accumulated balance to your heirs. When you die, your account beneficiary (or beneficiaries) must follow the same RMD rules that apply to inherited traditional IRAs.
5. Maximizing Retirement and Health Account Contributions
In general, it’s advisable to contribute as much as you can afford toward retirement accounts and health savings accounts (HSAs). HSAs allow people with high-deductible health plans to pay for their medical expenses with pretax dollars. The write-off for HSA contributions is an “above-the-line” deduction, so you can claim it even if you don’t itemize. In addition, the HSA contribution privilege isn’t tied to your income level. Unlike flexible spending accounts, undistributed HSA balances aren’t forfeited at year end. They can accumulate value, year after year. So, if you stay healthy and take minimal or no distributions, an HSA can function like a traditional IRA.
For 2024, the maximum contributions are:
$23,000 to 401(k) plans ($30,500 for those age 50 or older),
$7,000 to traditional IRAs ($8,000 for those age 50 or older),
$4,150 to HSAs for individual coverage ($5,150 for those age 55 or older), and
$8,300 to HSAs for family coverage ($9,300 for those age 55 or older).
Adding to these accounts reduces your taxable income for the current year and provides funds for later in life.
Important: The deadline for making 2024 contributions to 401(k)s is December 31, 2024. However, the deadline for making 2024 contributions to traditional IRAs and HSAs is April 15, 2025.
What’s Right for Your Situation?
During the 2024 election season, Republicans campaigned on promises of extending the individual tax breaks provided under the TCJA — and potentially cutting taxes even further. With the TCJA expiration date fast approaching, Congress is expected to begin deliberating on tax legislation in early 2025. However, the exact timing of when new tax laws could be introduced and enacted will depend on the legislative agenda set by congressional leaders and the Trump administration, as well as the complexities involved in negotiating and drafting comprehensive tax reforms.
We keep you updated on any law changes. Contact your tax advisor for more information on these and other federal (and state) tax planning moves that may apply to your current situation.
As the holiday season approaches, the IRS and its Security Summit partners issued a timely warning to taxpayers, with a special emphasis on employers and payroll professionals, about the increased risk of scams and identity theft. This alert comes as part of the ninth annual National Tax Security Awareness Week, highlighting the need for vigilance in protecting sensitive personal and financial information. ( IR 2024-300 , 12/2/2024)
If you own a successful small business with no employees, you might be ready to set up a retirement plan. Or you might want to upgrade from a more-basic SIMPLE IRA or Simplified Employee Pension (SEP) plan. Here are two options — solo 401(k)s and defined benefit pension plans — to consider if you have healthy self-employment income and want to contribute substantial amounts to your retirement nest egg.
Important: This article is geared toward self-employed individuals. That includes sole proprietors, partners, owners of single-member limited liability companies (LLCs) that are treated as sole proprietorships for tax purposes and members of multi-member LLCs that are treated as partnerships for tax purposes.
Solo 401(k) Plans
With a solo 401(k) plan, you can potentially make large annual deductible contributions to your retirement account. However, that advantage comes with some administrative complexity.
Click here to learn the maximum contribution amount allowed for this year, as well as the “catch-up” contribution amount for those over age 50.
On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This additional pay-in is called an “employer contribution,” though there’s technically no employer when you’re self-employed. For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.
For the 2025 tax year, the combined elective deferral and employer contributions can’t exceed:
$70,000 ($77,500 if you’ll be 50 or older as of December 31, 2025), or
100% of your net SE income.
Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business. For further information, see “How Much Can You Contribute to a Solo 401(k)?” at right.
Besides the ability to make large annual deductible contributions, another key advantage of solo 401(k) plans is that contributions are completely discretionary. When cash is tight, you can contribute a small amount or nothing. In years when you’re flush with cash, you can contribute the maximum allowable amount.
In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it (which you should insist on). The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other retirement plan options, including SEPs, don’t allow loans.
The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging for how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your solo 401(k) account balance exceeds $250,000, you must file Form 5500-EZ with the IRS each year. Fortunately, your tax and financial advisors can help you set up and operate the plan.
If your business has one or more employees, you obviously can’t have a solo 401(k). Instead, you’ll have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.
To take advantage of this exclusion rule, consider the feasibility of employing only younger and/or part-time workers. That way, you’ll effectively operate a solo 401(k).
Bottom line: For a one-person business, a solo 401(k) can be a smart tax-favored retirement plan choice if:
You want to make large annual deductible contributions and have the cash to do so,
You have substantial net SE income, and
You’re 50 or older and can, therefore, take advantage of the extra catch-up elective deferral contribution.
Before you jump on the solo 401(k) bandwagon, however, weigh the pros and cons of a defined benefit pension plan — especially if you’re 50 or older.
Defined Benefit Pension Plans
A defined benefit pension plan is designed to deliver a target level of annual payouts from your account after you reach a stipulated retirement age. You make annual deductible contributions, which must be calculated by an actuary, to fund target payouts.
Target payouts can be based on a fixed percentage of your average net SE income over a stipulated time period, a flat monthly dollar amount or a formula based on years of service. For the 2025 tax year, allowable contributions must be based on an annual target payout that can’t exceed $280,000 (up from $275,000 in 2024). A defined benefit pension plan can potentially allow large annual deductible contributions to fund generous retirement age payouts — resulting in large annual tax savings, especially if you’re 50 or over.
Making large annual tax-saving contributions might sound like a great idea, but not everyone has tons of cash available to cover big contributions. Plus, once your plan is set up, actuarially determined annual contributions are mandatory. In contrast, contributions to other types of plans are discretionary.
It’s also important to point out that defined benefit pension plans must generally cover your employees, too. However, the plan can include vesting and exclusion provisions to help prevent briefly employed workers from leaving with employer contributions.
Additionally, defined benefit plans are complicated. They generally require a customized plan document, along with annual actuarial calculations to determine how much to contribute each year. Your financial and tax advisors can help you crunch the numbers or locate a specialist who can help operate your pension at an affordable cost.
Bottom line: It’s important to clearly understand what you’re getting into before opting for a defined benefit pension plan.
How Much Can You Contribute to a Solo 401(k)?
When it comes to solo 401(k)s, elective deferral and employer contributions can really add up. To illustrate, suppose you’re 45 and operate a single-member limited liability company that’s treated as a sole proprietorship for tax purposes. In 2024, you have net self-employment (SE) income of $100,000 (after subtracting 50% of your SE tax bill).
In this case, the maximum deductible contribution to a solo 401(k) plan set up for your benefit would be $43,000. That amount is composed of 1) a $23,000 elective deferral contribution, and 2) a $20,000 employer contribution (20% of $100,000). This amount is significantly more than you could contribute to a Simplified Employee Pension (SEP). With a SEP, your maximum contribution would be $20,000 (20% of $100,000). The $23,000 difference is attributable to the solo 401(k)’s relatively generous elective deferral contribution.If, under the same business ownership scenario, you’re 50 or older, the maximum contribution to your solo 401(k) account would be $50,500. That amount is composed of 1) a $23,000 elective deferral contribution, including the $7,500 extra “catch-up” contribution, and 2) a $20,000 employer contribution (20% of $100,000).
What’s Best for You?
Solo 401(k)s and defined benefit pension plans are anything but simple. However, they can allow self-employed individuals to make substantial and deductible annual contributions to a retirement nest egg. Contact your tax and financial advisors before signing up for either option to determine what’s best for your situation.
New filing requirements issued by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) may impact your business. Corporations, limited liability companies (LLCs), limited partnerships, and other entities that file formation papers with any Secretary of State office (or similar government agency) must file a report with the U.S. Treasury Department’s FinCEN to provide specified information regarding the entity’s “beneficial owners.” Most entities in existence prior to January 1, 2024 must file this report by January 1, 2025.
Please note, our firm will not be preparing these reports on behalf of our clients as these are legal documents, not tax filings.
This new requirement is part of the federal government’s anti-money laundering and anti-tax evasion efforts and is an attempt to look beyond shell companies that are set up to hide money. Unfortunately, this will impose burdensome reporting requirements on most businesses, and the willful failure to report information and timely update any changed information can result in significant fines of up to $500 per day until the violation is remedied, or if criminal charges are brought, fines of up to $10,000 and/or two years imprisonment. These penalties can be imposed against the beneficial owner, the entity, and/or the person completing the report.
Beneficial owners are broadly defined and involve owners who directly or indirectly own more than 25% of the entity’s ownership interests or exercise substantial control over the reporting company (even if they don’t actually have an ownership interest). While this may seem to only impact a few significant owners, it can encompass many senior officers of the business as well as those individuals who are involved in any significant business decisions (e.g., board members). Given the severity of the fines, it may be safer to err on the side of overinclusion rather than under inclusion.
For entities formed after December 31, 2023, information will also have to be provided about the company applicants (the person who actually files the formation/registration papers and the person primarily responsible for directing or controlling the filing of the documents). The types of information that must be provided (and kept current) for these beneficial owners include the owner’s legal name, residential address, date of birth, and unique identifier number from a nonexpired passport, driver’s license, or state identification card. The entity will also have to provide an image of any of these forms of documentation to FinCEN for all beneficial owners.
In summary, most entities must file these reports by January 1, 2025. However, entities formed in 2024 and later years must file the report within 90 days of the entity’s formation.
Should any of the reported information change or a beneficial ownership interest be sold or transferred, the entity must report this information within 30 days of the change or face the potential of having the penalties described above imposed. Changes include reporting a beneficial owner’s change of address or name, a new passport number when a passport is replaced or renewed, or providing a copy of a renewed driver’s license.
As noted above, our firm is not preparing these reports. Regardless, we wanted to make sure you are aware of this new filing requirement and corresponding deadline.
The 2024 year-end is fast approaching! Given that this is an election year, and the presidential candidates are each promising big tax changes, it is important to start thinking about actions that may help lower your taxes for this year and the years to come.
We have compiled a list of potential actions based on current tax rules that may help you save tax dollars if you ACT BEFORE YEAR-END. Not all of them will apply to you, but you (or a family member) may benefit from many of them. Please review the following list. If you would like us to advise you on which tax-saving moves might be beneficial given your circumstances, please reach out to us at your earliest convenience so we can tailor a particular plan for you.
We have broken out the potential actions into the following sections:
Individuals
Stock Market Investor Strategies
Business
Individuals
For 2024, many taxpayers won’t need to itemize their deductions due to the high standard deduction ($29,200 for joint filers, $14,600 for singles and married filing separately, and $21,900 for heads of household) and the reduction or abolition of several itemized deductions.
Consider a bunching strategy to maximize deductions by concentrating medical expenses and charitable contributions into one calendar year.
Consider postponing income to 2025 (such as deferring a bonus) and accelerating deductions into 2024, especially for those anticipating a lower tax bracket in 2025. However, taxpayers expecting a more favorable filing status in 2024 or higher tax rates in 2025 may benefit more from accelerating income into 2024.
Consider donating appreciated publicly traded stock to get a two-fold benefit of the donation at fair market value without having to pick up the capital gains.
Consider using a credit card to pay deductible expenses before year-end.
Higher-income individuals should be cautious of the 3.8% surtax on certain unearned income. As year-end approaches, strategies to minimize or eliminate the surtax will vary based on estimated modified adjusted gross income and net investment income.
Higher-income earners may need to take year-end action regarding the 0.9% additional Medicare tax. This tax applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds. Employers must withhold the additional Medicare tax from wages in excess of $200,000, regardless of filing status or other income. Self-employed persons must take this tax into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.
Consider converting your traditional IRA into a Roth IRA in 2024 if you believe a Roth IRA is better for you. A conversion is generally best during a year where you expect lower taxable income and/or when you have funds invested in underperforming stocks or mutual funds. Keep in mind that this conversion will increase your taxable income and could reduce tax breaks subject to phaseouts at higher AGI levels.
Required minimum distributions (RMDs) from a traditional IRA have not been waived for 2024. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts. Taxpayers may want to take RMDs by the end of 2024 to avoid having to double up on RMDs in 2025.
Consider making charitable donations via direct qualified charitable distributions from your traditional IRAs if you are age 70½ or over by the end of 2024, especially if you are unable to itemize your deductions. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on as an itemized deduction. However, you are still entitled to claim the entire standard deduction.
If facing a penalty for underpayment of estimated tax and increasing wage withholding will not sufficiently address the problem, consider taking an eligible rollover distribution from a qualified retirement plan before the end of 2024. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2024. You can then timely roll over the gross amount of the distribution (the net amount received plus the taxes withheld) to a traditional IRA. No part of the distribution will be includible in income for 2024, but the withheld tax will be applied pro rata over the full 2024 tax year to reduce previous underpayments of estimated tax.
If you become eligible in December of 2024 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2024.
Consider making gifts sheltered by the annual gift tax exclusion ($18,000) before the end of the year. The exclusion applies to gifts of up to $18,000 made in 2024 to each of an unlimited number of individuals. You cannot carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Consider utilizing energy-related credits and deductions under the Inflation Reduction Act of 2022.
If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster related losses, you may be able to claim losses on the tax return for the year the loss occurred.
Stock Market Investor Strategies
As year-end approaches, you should consider the following moves to make the best tax use of losses from your stock market investments:
Sell investments at a loss to offset earlier gains. A generally preferred tax strategy is to sell enough of the down-turn investments to generate losses to fully offset your earlier gains plus an additional $3,000 loss. The current tax legislation caps net capital losses at a maximum annual deduction of $3,000, which in turn can be used to offset ordinary income (as opposed to only capital gains).
Since individual taxpayers may carryover excess capital losses indefinitely, there is no reason to sell appreciated stocks simply to generate offsetting capital gains.
Keep in mind the wash sale rule which disallows taxpayers from deducting capital losses generated on securities that were sold at a loss and subsequently reacquired within 30 days.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate.
If selling an investment in a qualified small business stock (QSBS), consider the tax savings and rollover provisions.
Review your ISO, NQ, and RSU holdings to determine strategies to minimize tax.
Business
This year’s business planning is particularly challenging due to uncertainty over potential legislation that could raise corporate tax rates and increase taxes on business owners’ ordinary income and capital gains next year. While the standard year-end strategy of deferring income and accelerating deductions remains effective for most small businesses, proposed tax increases may lead high-income businesses to benefit from pulling income into 2024 to take advantage of currently lower rates and deferring deductible expenses to 2025. Implementing these strategies will require careful evaluation of all relevant factors.
Taxpayers (excluding C-corporations) may qualify for a deduction of up to 20% of their qualified business income, with limitations based on the type of business, the amount of W-2 wages paid, and the unadjusted basis of qualified property held by the business.
More small businesses now can use the cash method of accounting (as opposed to the accrual method), qualifying if their average annual gross receipts do not exceed $30 million over a three-year testing period for 2024. This method allows taxpayers to more easily shift income by delaying billings to the next year or accelerating expenses.
The generous Section 179 expense deduction limits allow many small and medium-sized businesses to deduct most or all their expenses for timely machinery and equipment purchases (up to $1,220,000 for 2024).
In 2024, the bonus depreciation deduction rate will drop to 60%, falling by 20% per year thereafter until it is completely phased out in 2027 (assuming Congress doesn’t take action to extend it).
Businesses may be able to take advantage of the de minimis safe harbor election to expense lower-cost assets and supplies, provided these costs don’t need to be capitalized under UNICAP rules.
Consider funding a qualified retirement plan and/or setting up a Simplified Employee Pension (SEP). As a reminder, if you have five or more employees, you must either set up a retirement plan with CalSavers or set up your own alternative plan.
Consider having your flow-through entity pay a portion of your state tax liability under the Pass-Through Entity (PTE) tax credit provisions.
In 2024, domestic Research and Experimentation costs (commonly called R&D) must be capitalized and amortized over five years (fifteen years if foreign sourced) instead of being expensed immediately.
A corporation (other than a large corporation) expecting a small net operating loss (NOL) for 2024 (and substantial taxable income in 2025) may benefit from accelerating just enough of its 2025 income or deferring 2024 deductions to create a small taxable income for 2024.
Year-end bonuses can be strategically timed for tax benefits by both cash and accrual basis employers.
To reduce 2024 taxable income, consider deferring a debt-cancellation event until 2025 or to accelerate, consider finalizing a debt-cancellation event.
Take steps to utilize prior year suspended basis, at-risk, or passive losses.
If your partnership, corporation or LLC hasn’t already filed the new Beneficial Owner Information (BOI) Report with the U.S. Treasury Department’s Financial Crimes Enforcement Network, make sure to do so by January 1, 2025. While this is a legal document and not a tax form, we want to make sure you don’t miss this important filing.
These are just some of the year-end steps that can be taken to save taxes. As you can tell from this letter, many provisions are quite complex and require some analysis based on individual facts. Even if you do not believe any of these provisions will apply to your 2024 tax situation, you should consider contacting us prior to year-end to run a tax projection and help you avoid unnecessary surprises come April 2025.
A California superior court has certified a class action suit that will stop the FTB from erroneously imposing the $800 annual/minimum tax on many out-of-state entities. The affected entities are LLCs, LP’s and corporations that were passive investors in LLCs doing business in California but were not actually doing business in California themselves.
Recently, various investing apps such as Robinhood, SoFi, and Webull have begun offering bonuses to individuals who transfer their individual retirement account (IRA) to them. The bonuses are generally based on a percentage of the amount transferred. The percentages tend to range between 1% and 3.5% which can mean quite a significant amount of “free money” to the transferor depending on the value of their account. However, it is very important that anyone considering such a transfer fully understands all of the details of the bonus including the tax consequences that may come into play.
UPDATE: The IRS has further extended the deadline to October 16, 2023: Disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until October 16, 2023, to file various federal individual and business tax returns and make tax payments, the Internal Revenue Service announced on Friday. Previously, the deadline had been postponed to May 15th for these areas. See IR-2023-33, Feb. 24, 2023 for further details.
The IRS has provided disaster tax relief to victims of California storms that began on January 8, 2023. According to the IRS, storm victims who live or have a business in the disaster area now have until October 16, 2023, to file various federal individual and business tax returns and to make tax payments.
Disaster area. The disaster area includes the following counties: Alameda, Colusa, Contra Costa, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Tulare, Ventura, Yolo, and Yuba.
Postponed deadlines. The IRS has postponed various tax filing and payment deadlines that occurred beginning on January 8, 2023. As a result, individuals and households who live or have a business in the disaster area will have until October 16, 2023, to file returns and pay taxes that were originally due during this period.
This tax relief includes business returns due on March 15 and business and individual returns due on April 18, 2023. In addition, farmers who forgo making an estimated tax payment in January and normally file their returns by March 1, now have until October 16, 2023, to file their 2022 return and pay any tax due.
The October 16, 2023, deadline also applies to:
The quarterly estimated tax payments normally due on January 17, April 18, June 15 and Sept. 15 .
The quarterly payroll and excise tax returns normally due on January 31, April 30 and July 31.
In addition, penalties on payroll and excise tax deposits due on or after January 8, 2023, and before January 23, 2023, will be abated if the tax deposits are made by January 23, 2023.
Relief is automatic. The IRS will automatically apply this tax relief to any taxpayer with an address in the disaster area (“affected taxpayers”). However, affected taxpayers that receive a penalty notice from the IRS for a return that has a due date falling within the postponement period (January 8, 2023, to October 16, 2023) should call the phone number on the notice to have the penalty abated.
In addition, taxpayers who live or have a business outside the disaster area but whose tax records are in the disaster area and workers assisting in disaster relief activities should call the IRS at 866-562-5227 to ask for this tax relief.
Disaster losses. Victims in the disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the current year (2023) or prior year 2022 return. Taxpayers claiming disaster losses should write the FEMA declaration number—3691-EM—on any return claiming such a loss.
As of this posting, California has not conformed to this extended relief however, we expect they will shortly.
Please keep in mind that this relief doesn’t apply to information returns such as Forms W-2, 1094, 1095, 1097, 1098 or 1099 series; to Forms 1042-S, 3921, 3922 or 8027. These forms still have their normal due dates.
We recommend that you still submit all 2022 documents to our firm for completion of your return as soon as possible and use this relief as an opportunity to pay any tax as late as October 16th
If you have chosen the S corporation form for your business, you should be aware of certain steps that you should take to avoid an inadvertent termination of its S corporation status.
Avoid transfers to ineligible shareholders. In general, only individual U.S. citizens or residents, decedent estates, certain types of trusts, and certain exempt organizations may be S corporation shareholders. Therefore, it is important that you confirm that all the shareholders are eligible shareholders, i.e., (i) that no shareholder is a nonresident alien, a partnership, or a corporation; (ii) that all trusts are properly structured to be eligible shareholders, and (iii) that any election required for a trust shareholder is made.
Even if a corporation’s initial shareholders are all eligible shareholders, its S corporation status will terminate if any shares are transferred to a nonresident alien individual, a corporation, a partnership, or a trust (other than the specific types of trusts which may be S corporation shareholders).
In order to prevent a shareholder from terminating an S corporation’s status by transferring his shares to an ineligible shareholder, a shareholders’ agreement should prohibit transfers of any shares to any person other than a permitted S corporation shareholder and require a similar undertaking on the part of any transferee as a condition to any transfer. In addition, if permitted by local law, a restriction should be imposed in the corporation’s charter or by-laws that would void a purported transfer to an ineligible shareholder.
Avoid violating the shareholder limitation. An S corporation cannot have more than 100 shareholders at any time. Even if this limit is not exceeded at organization, the S status will terminate if the limit is exceeded at any time in the future, whether as a result of new issuances or transfers of shares.
New issuances of stock require corporate action. You should keep this in mind when considering future issuances of stock to avoid exceeding the 100 shareholder limit.
Transfers by shareholders can be somewhat more problematic, since they can occur without any action on the part of the corporation. Therefore, a shareholders’ agreement should prohibit any transfer of shares to a person who is not already a shareholder or if the transfer would cause the 100 shareholder limit to be exceeded and transfers should be conditioned on the transferee being subject to the same restriction. If permitted by local law, an appropriate restriction should also be imposed in the corporation’s charter or by-laws so that a purported transfer that caused the limit to be exceeded would be void.
Don’t issue more than one class of stock. An S corporation can only have one class of stock. Be sure to keep this requirement in mind when considering future changes to the capital structure of the corporation, including purported debt owed by the corporation that may be recharacterized as equity. The IRS allows S corporations to use various equity incentive compensation arrangements without violating the one class of stock restriction. If you want to create an equity incentive compensation plan, we would be happy to discuss with you how to structure the plan.
Avoid excess passive investment income. If an S corporation has accumulated earnings and profits (because it was once a C corporation or is a transferee of a C corporation), its S election will terminate if, for a period of three consecutive tax years, its “passive investment income ” exceeds 25% of its gross receipts.
The first step in avoiding an inadvertent termination under this rule is to keep track of the corporation’s passive investment income to determine whether the 25% limitation may be exceeded. Although excess passive income is subject to a special tax, S corporation status will terminate only if the limit is exceeded for three consecutive years.
If a corporation is in danger of exceeding the 25% passive income limitation for three consecutive years, there are two basic approaches to avoid termination of S corporation status. Since termination will only occur if the corporation has accumulated earnings and profits from C corporation years, termination can be avoided by stripping out those earnings and profits by way of a dividend. Ordinarily, distributions by an S corporation reduce pre-S corporation earnings and profits only after the accumulated income from all S corporation years has been distributed. However, it is possible to elect to treat distributions as coming from pre-S corporation earnings and profits first. Moreover, if it desired to strip out earnings and profits without actually depleting the corporation’s cash or other liquid assets, a “deemed” dividend election can be made. Be aware, however, that a distribution out of pre-S corporation earnings and profits (whether actual or under the deemed dividend election) is generally taxable to shareholders as a dividend (unlike a distribution from accumulated S corporation income which is generally a return of capital).
A second approach to avoiding termination under the passive income rules is to tailor the corporation’s operations so that the 25% passive income limit is not exceeded. Since termination will occur only after the limit is exceeded for three consecutive years, if you are willing to incur the tax on excess passive income, there should be sufficient time to take action to avoid a termination.
This can be done by reducing the amount of passive investment income, or by increasing the amount of other income. Since the test is applied to gross receipts, acquiring a business that produces receipts that are not passive investment income, even if it does not produce much in the way of net income, is one possible solution. It may also be possible to restructure certain operations so that passive income (e.g., certain rental income) becomes active income. (Unfortunately, an investment in municipal bonds producing tax -exempt interest is not a solution under these rules.)
If, despite appropriate precautions, S corporation status is nevertheless terminated, all is not lost. It is possible to apply to IRS for a “waiver” of an inadvertent termination of S status. Naturally, the safest course of action is to avoid a termination in the first place.
If you have any further questions, or if you’d like to go into the appropriate provisions to avoid transfers of stock which would cause a termination, please contact us!
With year-end approaching, it is time to start thinking about moves that may help lower your taxes for this year and next. We have compiled a list of actions based on current tax rules that may help you save tax dollars if you ACT BEFORE YEAR-END. Not all of them will apply to you, but you (or a family member) may benefit from many of them. Upon your request, we can narrow down specific actions to tailor a particular plan for you. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial. We have broken out the potential actions into the following sections:
Many taxpayers won’t need to itemize because of the high basic standard deduction amounts that apply for 2022 ($25,900 for joint filers, $12,950 for singles and for married filing separately, $19,400 for heads of household), and because many itemized deductions have been reduced or abolished, including the $10,000 limit on state and local taxes; miscellaneous itemized deductions; and non-disaster related personal casualty losses. You can still itemize medical expenses that exceed 7.5% of your adjusted gross income (AGI), state and local taxes up to $10,000, your charitable contributions subject to various limitations, plus mortgage interest deductions on a restricted amount of debt. However, these deductions won’t save taxes unless they total more than your standard deduction.
Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years’ worth of charitable contributions this year.
Postpone income until 2023 and accelerate deductions into 2022 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2022 that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may actually pay to accelerate income into 2022. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year. That is especially a consideration for high income taxpayers who may be subject to higher rates next year under proposed legislation.
Consider donating appreciated publicly traded stock to get a two-fold benefit of the donation at fair market value without having to pick up the capital gains.
It may be advantageous to try to arrange with your employer to defer, until early 2023, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.
Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2022 deductions even if you don’t pay your credit card bill until after the end of the year.
If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2022, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2022. However, this strategy is not good to the extent it causes your 2022 state and local tax payments to exceed $10,000.
Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).
As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer s estimated modified adjusted gross income (MAGI) and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.
The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.
If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2022 if eligible to do so. Keep in mind that the conversion will increase your income for 2022, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation or for those projected to be in a lower tax bracket this year.
Required minimum distributions RMDs from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have not been waived for 2022. If you were 72 or older in 2021 you must take an RMD during 2022. Those who turn 72 this year have until April 1 of 2023 to take their first RMD but may want to take it by the end of 2022 to avoid having to double up on RMDs next year.
If you are age 70½ or older by the end of 2022, and especially if you are unable to itemize your deductions, consider making 2021 charitable donations via direct qualified charitable distributions from your traditional IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on as an itemized deduction. However, you are still entitled to claim the entire standard deduction. (The qualified charitable distribution amount is reduced by any deductible contributions to an IRA made for any year in which you were age 70½ or older, unless it reduced a previous qualified charitable distribution exclusion.)
Take an eligible rollover distribution from a qualified retirement plan before the end of 2022 if you are facing a penalty for underpayment of estimated tax and increasing your wage withholding won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2022. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2022, but the withheld tax will be applied pro rata over the full 2022 tax year to reduce previous underpayments of estimated tax.
Consider increasing the amount you set aside for next year in your employer’s FSA if you set aside too little for this year and anticipate similar medical costs next year or if you anticipate more medical costs next year.
If you become eligible in December of 2022 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2022.
Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $16,000 made in 2022 to each of an unlimited number of individuals. You can’t carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2022 return normally filed next year), or on the return for the prior year (2021), generating a quicker refund.
If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2022 to maximize your casualty loss deduction this year.
As year-end approaches, you should consider the following moves to make the best tax use of paper losses and actual losses from your stock market investments:
Sell at a loss to offset earlier gains. If you have realized gains earlier in the year from sales of stock held for more than one year (long-term capital gains) or from sales of stock held for one year or less (short-term capital gains), take a close look at your portfolio with a view to selling some of the losers—those shares that now show a paper loss. The best tax strategy is to sell enough of the losers to generate losses to offset your earlier gains plus an additional $3,000 loss. Selling to produce this amount of loss is a good idea from the tax viewpoint because a $3,000 capital loss (but no more) can offset the same amount of ordinary income each year.
Suppose that you believe that the shares showing a paper loss still have the potential to turn around and eventually generate a profit. In order to sell and then repurchase the shares without forfeiting the loss deduction, you must avoid the wash-sale rules. This means that you must buy the new shares outside of the period that begins 30 days before and ends 30 days after the sale of the loss stock. However, note that if you expect the price of the shares showing a paper loss to rise quickly, your tax savings from taking the loss may not be worth the potential investment gain you may lose by waiting more than 30 days to repurchase the shares.
Use earlier-in-the-year losses to offset gains you would benefit from taking. If you have capital losses on sales earlier in the year, consider whether you should take capital gains on some stocks that you still hold. For example, if you have appreciated stocks that you would like to sell, but don’t want to sell if it will cause you to have taxable gain this year, consider selling just enough shares to offset your earlier-in-the-year capital losses (except for $3,000 of those which can be used to offset ordinary income). You should consider selling appreciated stocks now if you believe those stocks have reached (or are close to) the peak price and you also believe that you can invest the proceeds from the sale in other property that will give you a better rate of return in the future.
If this strategy applies to you, and your holdings showing a paper gain consist of stocks you haven’t held for more than one year, as well as stocks you have held for more than one year, you should consider selling those stocks on which you will have short-term gain first, and then stocks that would yield long-term gain. This way, you’ll be in a better position to wind up with gain taxed at favorable rates when you sell other stocks with paper gains. To the extent possible, you should also try to use long-term capital losses to offset short-term capital gains. This can be done, however, only if the total of your long-term capital losses is more than your long-term capital gains. Deferring long-term capital gains until next year is one way of achieving this goal.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $83,350 for a married couple). If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.
Since individual taxpayers may carry over capital losses indefinitely, there is no reason to sell appreciated stocks just to have offsetting gains. If you don’t have a better investment for the proceeds of a sale of these stocks, don’t sell them. You can carry over your capital losses to next year when you may have a better opportunity to make use of those losses. You can even offset another $3,000 of the carried over losses against ordinary income next year (and in succeeding years if the full amount of the capital loss carryover is not used next year).
If selling an investment in a qualified small business stock, consider the tax savings and rollover provisions.
Review your ISO, NQ, and RSU holdings to determine strategies to minimize tax.
The recently enacted Inflation Reduction Act of 2022 contains a multitude of new environmentally related tax credits that are of interest to individuals and small businesses. The Act also extends and modifies some pre-existing tax credits:
Extension, Increase, and Modifications of Nonbusiness Energy Property Credit. Before the Act, you were allowed a personal credit for specified nonbusiness energy property expenditures. The credit applied only to property placed in service before January 1, 2022. Now you may take the credit for energy-efficient property placed in service before January 1, 2033.
Increased credit: The Act increases the credit for a tax year to an amount equal to 30% of the sum of (a) the amount paid or incurred by you for qualified energy efficiency improvements installed during that year, and (b) the amount of the residential energy property expenditures paid or incurred by you during that year. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can’t exceed $150.
Annual limitation in lieu of lifetime limitation: The Act also repeals the lifetime credit limitation, and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
Extension and Modification of Residential Clean Energy Credit: Before the Act, you were allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes in years before 2024.
The Act makes the credit available for property installed in years before 2035. The Act also makes the credit available for qualified battery storage technology expenditures.
Extension, Increase, and Modifications of New Energy Efficient Home Credit: Before the Act, a New Energy Efficient Home Credit (NEEHC) was available to eligible contractors for qualified new energy efficient homes acquired by a homeowner before Jan. 1, 2022. A home had to satisfy specified energy saving requirements to qualify for the credit. The credit was either $1,000 or $2,000, depending on which energy efficiency requirements the home satisfied.
The Act makes the credit available for qualified new energy efficient homes acquired before January 1, 2033. The amount of the credit is increased, and can be $500, $1,000, $2,500, or $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets prevailing wage requirements.
New Clean Vehicle Credit: Before the enactment of the Act, you could claim a credit for each new qualified plug-in electric drive motor vehicle (NQPEDMV) placed in service during the tax year.
The Act, among other things, retitles the NQPEDMV credit as the Clean Vehicle Credit and eliminates the limitation on the number of vehicles eligible for the credit. Also, final assembly of the vehicle must take place in North America.
No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household, or $150,000 for others. In addition, no credit is allowed if the manufacturer’s suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs).
Finally, the way the credit is calculated is changing. The rules are complicated, but they place more emphasis on where the battery components (and critical minerals used in the battery) are sourced.
Credit for Previously-Owned Clean Vehicles: A qualified buyer who acquires and places in service a previously-owned clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
New Credit for Qualified Commercial Clean Vehicles: There is a new qualified commercial clean vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The credit per vehicle is the lesser of: (1) 15% of the vehicle’s basis (30% for vehicles not powered by a gasoline or diesel engine) or (2) the “incremental cost” of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.
Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities: Under pre-Act law, a “qualified small business” (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.
Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
Extension of Incentives for Biodiesel, Renewable Diesel and Alternative Fuels: Under pre-Act law, you could claim a credit for sales and use of biodiesel and renewable diesel that you use in your trade or business or sold at retail and placed in the fuel tank of the buyer for such use and sales on or before December 31, 2022. Now you are permitted to claim a credit for sales and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel, and alternative fuel mixtures on or before December 31, 2024.
You are also allowed now to claim a refund of excise tax for use of (1) biodiesel fuel mixtures for a purpose other than for which they were sold or for resale of biodiesel mixtures on or before December 31, 2024 and (2) alternative fuel as fuel in a motor vehicle or motorboat or as aviation fuel, for a purpose other than for which they were sold or for resale of such alternative fuel mixtures on or before December 31, 2024.
This year’s business planning is more challenging than usual due to the uncertainty surrounding pending legislation that could increase corporate tax rates plus the top rates on both business owners ordinary income and capital gain starting next year.
Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value.
If proposed tax increases do pass, however, the highest income businesses and owners may find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at currently lower rates, and deferring deductible expenses until 2023, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly, (approximately half that for 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. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.
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 2022. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting us.
More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2022 if, during a three-year testing period, average annual gross receipts don’t exceed $27 million. Not that many years ago it was $1 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings until next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2022, the expensing limit is $1,080,000, and the investment ceiling limit is $2,700,000. Expensing is 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 or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, 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 during the last days of 2022, rather than at the beginning of 2023, can result in a full expensing deduction for 2022.
Businesses also can claim a 100% 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 100% 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 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2022.
Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren’t required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500.
Plan for funding a qualified retirement plan / setting up a Simplified Employee Pension (SEP).
Consider having your flow through entity pay a portion of your state tax liability under the new Pass-Through Entity tax credit provisions.
A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2022 (and substantial taxable income in 2023) may find it worthwhile to accelerate just enough of its 2023 income (or to defer just enough of its 2022 deductions) to create a small amount of taxable income for 2022. This allows the corporation to base its 2023 estimated tax installments on the relatively small amount of income shown on its 2022 return, rather than having to pay estimated taxes based on 100% of its much larger 2023 taxable income.
Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers. 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. However, 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 as long as not paid to an over 50% owner of the corporation. 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 2.5-month window or change the bonus plan terms to make the bonus amount not determinable at year end.
To reduce 2022 taxable income, consider deferring a debt-cancellation event until 2023 or to accelerate, consider finalizing a debt-cancellation event.
Take steps to utilize prior year suspended basis, at-risk or passive losses:
Suspended basis and at-risk losses can be freed up by contributing capital into the business.
Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of 2022 income is desired, consider disposing of a passive activity before year-end to take the suspended losses against 2022 income. If possible 2023 top rate increases are a concern, holding off on disposing of the activity until 2023 might save more in future taxes.
These are just some of the year-end steps that can be taken to save taxes. As you can tell from this letter, many provisions are quite complex and require some analysis based on individual facts. Even if you don’t believe any of these provisions will apply to your 2022 tax situation, you should consider contacting us so at a minimum, we can run a tax projection to help you avoid unnecessary surprises come April 2023. Again, by contacting us, we can tailor a particular plan that will work best for you.
