We’ve closed another year marked by economic uncertainties, and one constant remains—the potential to enhance your company’s financial health by strategically managing your tax obligations. Below, we outline practical and timely strategies tailored for business owners looking to navigate the intricate landscape of tax planning.
The Tax Cuts and Jobs Act (TCJA) imposed a $10,000 cap on federal income tax deductions for state and local taxes (SALT). Over 30 states, including California, have implemented “workaround” measures benefiting PTE owners to counter this. These provisions allow partnerships, LLCs, and S corporations to pay entity-level state tax, providing owners with corresponding benefits, such as tax credits or deductions. This strategy lets your business bypass the SALT limit, resulting in potential federal business expense deductions.
Cash balance retirement plans are making a comeback, especially for businesses with high-earning individuals who consistently hit their 401(k) limits. These plans offer a unique fusion of defined contribution and defined benefit plans, allowing businesses to claim substantial deductions for contributions.
Remember, under the original SECURE Act, businesses have until their federal filing deadline (including extensions) to set up a cash balance plan. But here’s the practical insight: it takes some time to get everything in order—documents, contribution calculations, and administrative tasks. So, it’s wise to kickstart the process sooner rather than later.
This strategy helps secure your financial future and offers a valuable tax advantage for your business.
Are you using the cash method for income tax reporting? Consider accelerating year-end deductions in December and deferring income until January to optimize your 2023 income. For instance, pay bills and employee bonuses for 2023 before year-end and stock up on supplies to accelerate deductions. Conversely, if higher profits are anticipated in the upcoming year, consider the opposite approach—accelerate income and postpone deductions to maximize their value. Consider the impact on your Qualified Business Income (QBI) deduction, especially if your business operates as a pass-through entity.
A cornerstone of the 2017 tax reform, the QBI deduction for pass-through entities allows owners to claim up to 20% of their QBI, subject to specific limitations. Manage your taxable income wisely, as accelerated depreciation and certain tax breaks tied to taxable income can affect your QBI and subsequent deductions.
Seize the opportunity for first-year bonus depreciation for qualified property acquired and placed in service in 2023. While the benefit gradually diminishes, it remains at 80% for this tax year. Prioritize using IRC Section 179 expensing election for asset purchases, enabling you to deduct 100% of the purchase price for eligible assets. Be aware of the $1.16 million maximum deduction and plan strategically to maximize this tax-saving tool.
Explore the 100% federal income tax gain exclusion for eligible sales of Qualified Small Business Corporation (QSBC) stock acquired after September 27, 2010. Hold QSBC shares for over five years to qualify for the gain exclusion. Planning is crucial to secure this exclusion privilege.
Employing family members can be a strategic move to reduce overall tax liability. Deduct wages and benefits, including medical benefits, paid to family employees, reducing self-employment tax liability. Wages paid to children under 18 are not subject to federal employment taxes, providing potential tax savings.
Remember, seemingly minor tax decisions may have significant consequences. Please consult with us to ensure your business makes informed year-end tax planning moves that align with your goals.
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