As we approach the end of the year, now is the time to consider actions that could lower your business’s tax obligations for both 2023 and 2024. To help guide you on your journey, we have put together a list of potential tax-saving moves based on the most up-to-date tax regulations. While not every suggestion may apply to your situation, many could offer meaningful savings when implemented thoughtfully. Here are some key year-end tax considerations to review. If you have any questions, you can always reach out to our office to discuss which of these strategies may benefit you.
Qualified Business Income Deduction
Certain non-corporate taxpayers may qualify for a deduction of up to 20% on qualified business income (QBI). For 2023, this deduction may phase out if taxable income exceeds $364,200 for married couples filing jointly (or about half that for other filers). The deduction can be influenced by factors such as the business’s trade type (e.g., law, consulting, health services), W-2 wages, or unadjusted property basis. The income limits phase is based on a $100,000 income buffer for joint filers and a $50,000 buffer for other filers. In 2024, the phase-out threshold will rise to $383,900.
To maximize this deduction, consider strategies like deferring income or accelerating expenses to remain under these limits. Some businesses may also find value in increasing W-2 wages before year-end to enhance the deduction.
Cash Method of Accounting for Small Businesses
More small businesses are now eligible to use the cash accounting method, making it easier to manage income. For 2023, businesses with average gross receipts not exceeding $29 million over a three-year testing period may qualify. For 2024, the gross receipts limit will increase to $30 million.
Using this method can simplify tax planning by allowing you to delay billings or prepay expenses.
Business Property Expensing and Bonus Depreciation
For tax years beginning in 2023, the expensing limit for business property is $1,160,000, with an investment ceiling of $2,890,000. These limits increase to $1,220,000 and $3,050,000 for 2024. Small to medium-sized businesses can often deduct most, if not all, of their equipment and machinery outlays under these provisions. Eligible items placed into service before year-end qualify for a full deduction, regardless of service duration.
Additionally, businesses can claim an 80% bonus first-year depreciation deduction on new and certain used machinery and equipment purchased and placed in service during 2023. Note that bonus depreciation is set to phase down, decreasing to 60% in 2024, 40% in 2025, and eventually phasing out entirely by 2027.
De Minimis Safe Harbor Election
To streamline small asset deductions, businesses may benefit from the de minimis safe harbor election, which allows for expensing lower-cost items. For taxpayers with an applicable financial statement (AFS), the maximum expense is $5,000 per unit of property; without an AFS, this cap drops to $2,500. If relevant, consider purchasing qualifying assets before year-end to take advantage of this benefit.
Net Operating Loss Planning for Corporations
Corporations expecting a minor net operating loss (NOL) for 2023 may strategically accelerate some income or defer deductions to produce minimal taxable income. This approach allows the corporation to base next year’s estimated tax on the current year's smaller income, easing cash flow demands and tax obligations in 2024.
Timing of Year-End Bonuses
For cash basis employers, bonuses are deductible in the year paid, while accrual-basis employers can claim deductions in the year accrued. To maximize the tax benefit, cash basis employers may time bonus payments for either the current or following year, depending on their tax strategy. Accrual-basis employers should note that bonuses must be paid within two months after year-end to qualify for the current year’s deduction.
Deferring Debt Cancellation Income
Postponing a debt-cancellation event until next year can reduce this year’s taxable income, which may be beneficial under certain financial and tax circumstances.
Disposition of Passive Activities
If you’re holding passive activity losses, consider disposing of the activity before year-end to leverage suspended losses against current income. This strategy can be helpful in offsetting higher taxable income for 2023.
Final Considerations
The suggestions outlined above are just a sampling of the steps your business can take to optimize its tax position before year-end. Reach out to us to discuss these strategies further, and together, we’ll develop a year-end plan that maximizes your savings and positions your business for financial success in the coming year.
Year-End Tax Strategies for 2023