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If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold, I’ll tax the heat
If you take a walk, I’ll tax your feet
‘Cause I’m the taxman
— The Beatles
The days are getting shorter, the weather has more of a snap, and the annual joy (LOL) known as tax season is getting closer. In an effort to dull the pain and, possibly, reduce the bite of federal and state taxes, NJBIZ asked some CPAs for last-minute tips.
“Unlike some periods, when it looked like tax rates might be going down, that’s not in the cards this time,” said Phillip Goldstein, CEO of Goldstein Lieberman & Co. LLC. “So, in general, the longtime advice to accelerate expenses into this calendar or fiscal year and defer revenue into next year still holds.”
Cash-basis taxpayers, which tend to be smaller businesses, generally recognize income when they collect it. “Depending on their cash flow needs, some business owners may consider postponing invoicing some clients until Jan. 1, 2024,” he counseled. “And they might think about accelerating the payment of certain expenses that are not due until 2024. If a credit card is used, then the business still gets the write-off, even if the credit card bill isn’t due until 2024.”
Goldstein also noted that businesses may be able to offset some of their taxable 2023 income, thanks to the federal Section 179 deduction. “If they meet certain limits, the 179 write-off may allow businesses to immediately deduct 100% of the purchase price for eligible business property purchases, instead of depreciating them over multiple periods,” he explained. “On top of that, after they max out their 179, qualified businesses may be able to take bonus, or accelerated depreciation on certain purchases.”
Year-end tax moves are all about strategic thinking, according to Eisner Advisory Group Corporate Tax Partner Alexandra Colman. “The ability to take bonus, or accelerated depreciation on qualified assets – generating more expense that may be offset against taxable income – is scheduled to drop from an immediate 80% write-off in 2023 to only 60% in 2024,” she said. “So, depending on your capital expenditure budget and cash flow, it may make sense to purchase machinery or equipment now, before year end, instead of deferring it until next year.”
Companies may also get a break for being sensitive to environmental issues, she added. “Under certain programs, businesses may be eligible to purchase renewable energy tax credits at an average 10% discount from “green” energy producers,” said Colman. “For example, a solar or wind producer that has $1 million of tax credits may be willing to turn them over to a company for $900,000.”
And even as interest rates rise, most businesses that borrow heavily may be hit by a reduction in the amount of interest expense they claim. “The Business Interest Expense Limitation is a provision of the tax code that generally limits the amount of business interest expense that can be deducted on a tax return,” she explained. “Under it, the business interest expense deduction is generally limited to 30% of the business’ adjusted taxable income under Internal Revenue Code section 163(j). As a result, companies with high levels of interest expense may want to consider trying to renegotiate their debt terms or, if it makes sense, try to pay down their debt load.”
For Shamisa Zvoma, a tax partner with Wiss, the fourth quarter is a “a great time for a year-end review. In general, a deep review can enhance an owner’s understanding of the dynamics of their business and help them to maximize efficiencies.”
Focusing on year-end tax tips, she observed that “a lot of the conversation will center on whether to defer income into early 2024, and accelerate expenses into 2023. But if you think you’ll see more profits in 2024, you may want to do the reverse: accelerate income into 2023, if your business will be in a lower tax bracket, and defer expenses where possible until 2024, if your taxable bracket will be higher and the write-offs will be more valuable.”
Business owners who want to reduce their 2023 income may also want to think about distributing bonuses or increasing their retirement contributions, she added. “And if you were planning on purchasing equipment or machinery next year, keep in mind that the bonus depreciation will be dropping in 2024 to 60% — in 2023, however, it’s 80%, so accelerating your purchase could net you a nice tax break.”
Overall, noted Zvoma, “2023 has been a pretty sedate year as far as taxes go. The real action will be 2024, when the presidential election happens, and 2025, when the new administration puts its plans into action and, at the same time, many Trump-era tax breaks are slated to expire. One of the big ones is the qualified business deduction, which, among other provisions, enabled non-corporate taxpayers to shield up to 20% of their certain business income from taxes. The 2017 Tax Cuts and Jobs Act is scheduled to expire at the end of 2025 – it swept in many changes, and their expiration, unless Congress extends them – will be like Tax Armageddon.”
Watching the IRS
One of the provisions of the Inflation Reduction Act of 2022 – an $80 billion infusion to the IRS, which will reportedly let the federal agency hire some 87,000 employees – caused consternation among some business owners and supporters, who worry about hordes of agents launching waves of audits that can strain the resources of small companies. But Goldstein said he thinks the fears are overblown.
“Companies of all sizes are already having trouble hiring qualified accountants to produce timely reports,” he explained. “On the ladder of salary, IRS usually occupies the bottom rung, or close to it, so I don’t think they’ll be able to attract that many good people who can be trained to handle an audit.”
Besides, he observed, “A good chunk of the funding will probably go toward upgrading IRS’ antiquated computer and customer-service systems. When I call a special IRS hotline that’s reserved for professionals, I can be on ‘hold’ for the whole day. And when I send certified letters to the agency, the responses I receive make me think that they never even read my letter. If the IRS ever gets around to adopting artificial intelligence, it might make a difference and free up their audit staff. Then again, many IRS computers are still running on outdated software, so there’s not a big chance that they’ll be able to upgrade to AI anytime soon.”