Year-End Tax Planning Considerations for 2023

This year has been unique. We’ve seen the market rebound and inflation slow down, all while interest rates have reached highs we’ve not experienced in 22 years. The rise in interest rates will alter those end-of-year tax strategies many have come to rely on in years past, requiring business owners to reset and reevaluate their plans for closing out the calendar year.

It’s important to remember that the end goal should not be blindly pushing income into the following year, or pulling expenses into the current year, without understanding the long-term impact.  The focus should ultimately be on the key strategies of business tax planning.

Although most investors and small business owners strive to implement tax planning strategies throughout the year, there are often items that need to be considered prior to year-end.

Now is the time to pause and review your individual situation to ensure you’ve maximized your tax planning as we approach the last calendar quarter of the year.

Corporate Tax Planning Strategies

• Know if your state allows a Pass-Through Entity tax deduction.
  • Over 30 states have state income tax that allows owners of S-Corporations or Partnerships to pay their state income tax at the entity level for the portion of their income that is passed through on their K-1.
  • The new states that have been added in 2023 are Indiana, Kentucky, West Virginia, Missouri and Nebraska. Most of these states allow a retroactive election of the Pass-Through Entity tax.
  • This allows you to receive a federal tax deduction for a portion of your state taxes that would otherwise not be deductible.
  • The tax payments need to be made prior to Dec. 31, 2023, to be deducted in 2023.

• Consider a Defined Benefit Plan, and it’s not too late to add this plan for 2023.
  • Have you maximized your 401(k) Plan but are still looking for a way to save more in a tax-deferred environment and have excess cash flow?
  • If a cash balance plan has been on your to-do list, most advisors will generally continue to set these up if it makes financial sense for the client. The original Secure Act granted extended time, allowing set-up to roll into the new calendar year as long as it’s complete before filing your 2023 return.

• Consider accelerating expenses before year-end.
  • It is not expected that the tax law will change in 2024. For this reason, the fundamental concept of accelerating expenses is still sound.
    • A common example of this is accelerating supply orders you would normally pay next year before year-end.
    • Another example of this is pre-paying for a CE course or business trip you know is on the horizon for the year to come.
    • This may not be the right approach for someone who expects to earn significantly more income in the following year. Consult your financial advisor.

• Purchase equipment before year-end and ensure it is “placed in service” by Dec. 31, 2023.
  • If you need new equipment that will increase your ability to make more money in the future, purchase this before year-end.
    • Section 179 and bonus depreciation rules allow doctors to write off substantial equipment purchases.
    • CWA advisors caution you not to purchase the equipment just to avoid taxes. In that case, it is more economical to just pay the taxes.
    • CWA advisors also suggest that you consider the increase in interest rates if you are planning on using financing to obtain the equipment.
    • Placed in Service is defined as when the property is ready and available for use. This includes when the equipment is held in local storage.

• If planning leasehold improvements to qualified business property, ensure it is placed in service by Dec. 31, 2023.
  • A taxpayer can claim bonus depreciation on 80% of the property’s cost basis through 2023.
    • The bonus depreciation percentage will continue to decline by 20% each year until reaching 0% in 2027 and beyond.
    • This decline makes it more important to complete your office’s leasehold improvement projects in 2023 to maximize your tax benefits.
    • Review “qualified business property” to ensure your improvements qualify.
    • Not all states offer this tax benefit.

• Reimburse yourself for business expenses you personally paid by year-end.
  • If you have personally paid any business expenses this year, have the business reimburse you before year-end.
    • For 2023, the deduction for business meals is back to 50%.
    • Know what you can and cannot deduct from business-related travel.
    • Entertainment expenses generally are not deductible although there are many exceptions.

• S-Corporation Health Insurance
  • If you operate your business in an S-Corporation and pay for your health insurance through your business, you must report the premiums paid on your form W-2.
    • While these premiums are not considered wages for employment taxes, they must be reported here in order to be deducted from the S-Corporation and the shareholder’s personal return.