In the last few months of the year, it is important to consider year-end tax planning opportunities as many may provide both immediate and long-lasting financial benefits.
This year has brought incredibly unique challenges and significant change. Businesses that have not yet explored year-end tax planning should take an immediate inventory of their situation to ensure they are sufficiently informed and well-positioned to minimize current and future tax burdens. Whether it be refining past plans, developing new ones, or a combination of both, our office is ready to assist you.
We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply to your situation, but you may likely benefit from some of them. We can narrow down the specific actions that you can take once we meet with you to tailor a customized plan. In the meantime, please review the following list and contact us at your earliest convenience to advise you on which tax-saving moves to make.
Federal
Bonus Depreciation and Code Section 179 Expensing
Among the top two incentives for small businesses are bonus depreciation and the Code Sec. 179 small business expensing provision. These two provisions were greatly expanded with the Tax Cut and Jobs Act of 2017. Bonus depreciation continues at 100% for property placed in service in 2022. After 2023, bonus depreciation available will drop, as follows:
- 80% for property placed in service in 2023
- 60% for property placed in service in 2024
- 40% for property placed in service in 2025
- 20% for property placed in service in 2026
- 0% for property placed in service in 2027 and later years
Both used equipment and new equipment qualify. The Section 179 deduction limit increased to $1,080,000 for 2022 from $1,050,000 in 2021. These two incentives can provide significant tax relief in 2022 if financed and placed in service by midnight on December 31, 2022.
Additionally, the Coronavirus Aid, Relief, and Economic Security (CARES) Act assigned a 15-year recovery period to Qualified Improvement Property (QIP), which previously had been required to be depreciated over 39 years under the Tax Cuts and Jobs Act. This modification means that QIP is now eligible for bonus depreciation at 100% and is effective for QIP placed into service after December 31, 2017. Qualified Improvement Property includes improvements made to an interior portion of an existing residential or nonresidential building.
Repair Capitalization Rules
Another valuable incentive for year-end planning is the de minimis safe harbor threshold amount under the final “repair regs” for taxpayers. Currently, a de minimis safe harbor under the repair regs allows taxpayers to deduct certain items costing $5,000 or less (per item or invoice) that are deductible in accordance with the company’s accounting policy reflected on their applicable financial statement (AFS). IRS regulations also provide a $2,500 de minimis safe harbor threshold for taxpayers without an applicable financial statement.
Research Tax Credit (“R&D Tax Credit”)
Eligible taxpayers with an average of $50 million or less in gross receipts over the previous three years may claim the federal R&D tax credit against their alternative minimum tax liability. The PATH Act also allows startup businesses with no federal tax liability and gross receipts of less than $5 million to take the R&D tax credit against their payroll taxes for tax years beginning after December 31, 2015, essentially making it a refundable credit capped at $500,000 (previously $250,000) for up to five years. The Research and Development tax credit is one of the most lucrative incentives under current U.S. tax law because it is a dollar-for-dollar reduction in tax liability. Depending on a company’s qualified research expenses, the credit can include eligible wages, supplies, and outside contractor expenses. In addition, the vast majority of states also offer some form of credit with many of those states offering a permanent form of credit (please see kbkg.com/research-tax-credits/state-benefits for a list of states offering a research credit). To see if your company qualifies or if you have any questions regarding the research credit, please contact one of our R&D tax credit professionals (kbkg.com/research-tax-credits).
Pass-Through Entities & Passive Losses
To reduce 2022 taxable income, consider disposing of a passive activity in 2022 if doing so will allow you to deduct suspended passive activity losses. If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
Qualified Business Income Deduction for Pass-through Entities
This break is available to individuals, estates, and trusts that own interests in pass-through business entities. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.
Service business limitation. The QBI deduction is limited for specified service businesses (such as most professional practices and investment-type service businesses). Under an exception, the service business limitation does not apply until an individual owner’s taxable income exceeds $170,050 ($340,100 for joint filers). Above those income levels, the service business limitation is phased in over a $50,000 phase-in range ($100,000 range for joint filers). If the 199A deduction is limited by taxable income, additional income may get a 20% deduction even if it is not qualified business income (and not capital gains). When a taxpayer is within or over the phaseout range, reducing income or increasing deductions can increase the 199A deduction. Maximizing or minimizing depreciation and 179 deductions can be a useful tool to obtain a larger 199A deduction.
Cost Segregation Studies
Cost Segregation is a commonly used strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.
When a property is purchased, not only does it include a building structure, but it also includes all of its interior and exterior components. On average, 20% to 40% of those components fall into tax categories that can be written off much quicker than the building structure. A Cost Segregation study dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27 ½ or 39 years. The primary goal of a Cost Segregation study is to identify all property-related costs that can be depreciated over 5, 7, and 15 years. For example, certain electrical outlets that are dedicated to equipment such as appliances or computers should be depreciated over five years.
Employee Retention Credit
The Employee Retention Tax Credit (ERTC) was created as part of the CARES Act to encourage businesses to continue paying employees by providing a credit to the eligible employer for wages paid to eligible employees. The refundable credit is available from March 13, 2020, through September 30, 2021, and can be utilized even if companies received PPP loans. Businesses that started up after February 15, 2020, are eligible for up to $100,000 of credits on wages paid from June 1, 2021, through December 31, 2021. Recipients of PPP loans are now eligible to qualify retroactively for the credit in 2020 and 2021. Businesses have until April 15, 2024, to file amended returns for Q2, Q3, and Q4 of 2020, and until April 15, 2025, to file amended returns for all 2021 quarters.
For 2021, there is a maximum credit of $7,000 per eligible employee, per quarter. The 2021 credit is computed at a rate of 70% of qualified wages paid, up to $10,000 per eligible employee, per quarter. For Eligible Employers with less than 500 average full-time employees in 2019, the credit is available for all employees receiving wages in 2021. For 2020, there is a maximum credit of $5,000 per eligible employee. The 2020 credit is computed at a rate of 50% of qualified wages paid, up to $10,000 per eligible employee for the year. For Eligible Employers with less than 100 average full-time employees in 2019, the credit is available for all employees receiving wages in 2020.
To qualify for the ERTC, an employer must have either had their operations fully or partially suspended due to orders from a government authority or suffered a significant decline in quarterly gross revenue as measured against 2019 (50% decline for 2020; 20% decline for 2021).
Inflation Reduction Act Provisions
The Inflation Reduction Act (IRA) increases the amount of research credit that qualified small businesses may elect to treat as a credit against their payroll tax liability from $250,000 to $500,000
The IRA includes a significant amount of incentives/tax credits for green energy. The IRA introduces a new business credit for qualified commercial clean vehicles in an amount equal to the lesser of 15% (Or 30% for non-gas-powered engines) of the basis or the incremental cost of the vehicle. The maximum credit is $7,500 or $40,000 if the vehicle has a gross vehicle weight of at least 14,000 pounds. This credit will expire in 2033.
The IRA created a new business tax credit for clean electricity production. The credit equals the kilowatt hours of electricity produced and sold, multiplied by a base amount of .3 cents or 1.5 cents (adjusted for inflation). The credit is applicable in tax years 2025 – 2032.
The IRA created a new clean electricity investment credit which is applicable to tax years 2025 – 2032. The base credit is 6% of the qualified investment (energy storage technology and qualified facilities), with increases available if other specific requirements related are met.
The IRA extends the Residential Clean Energy Credit through 2034. The credit is a 30% tax credit on qualified solar property for your home including battery storage.
The IRA extended and modified the EV tax credit for electric vehicles. The credit allows for up to a $7,500 credit on new electric vehicles and up to a $4,000 credit for used electric vehicles. If you’re single, and your modified adjusted gross income is over $150,000, you won’t qualify for the EV tax credit. The EV tax credit income limit for married couples who are filing jointly is $300,000. And if you file as head of household and make $225,000 or more, you also won’t be able to claim the credit. Vehicle price and type also matter. Vans, pickup trucks, and SUVs with a manufacturer’s retail suggested price (MSRP) of more than $80,000, won’t qualify for the credit. For clean cars to qualify for the EV tax credit, the MSRP can’t be more than $55,000.
California
New Employment Credit
For tax years beginning on or after January 1, 2014, and before January 1, 2026, a nonrefundable credit against corporation franchise and income and personal income taxes is available to qualified employers that hire qualified full-time employees to work in a designated census tract or economic development area (EDA) provided the taxpayer pays qualified wages and satisfies other procedural requirements. A “designated census tract” is a census tract determined by the Department of Finance to be in the top 25% of California census tracts in terms of civilian unemployment and poverty rates. For purposes of this credit, “economic development areas” are specified as former enterprise zones or LAMBRAs. (Sec. 23626 (b) (7) and (8), Rev.& Tax. Code) A map and search tool with all of the designated census tracts and economic development areas is available on the FTB’s website.
In addition, an annual certification of employment is required with respect to each qualified full-time employee hired in a previous taxable year. To be allowed a credit, the qualified taxpayer must have a net increase in the total number of full-time employees in California.
California Competes Tax Credit
The California Competes Tax Credit is an income tax credit available to businesses that want to come to California or stay and grow in California. The credit is based on numerous factors, including the number of jobs created, geographical location, compensation paid to employees, and overall business economic impact. Tax credit agreements will be negotiated by GO-Biz and approved by a statutorily created “California Competes Tax Credit Committee,” consisting of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, and one appointee each by the Speaker of the Assembly and Senate Committee on Rules.
A total of $304,727,233 in the California Competes Tax Credit is available for allocation in the 2022-2023 fiscal year. GO-Biz will accept applications for the California Competes Tax Credit during the following periods:
- July 25, 2022, through August 15, 2022 ($120 million available)
- January 3, 2023, through January 23, 2023 ($120 million available)
- March 6, 2022, through March 20, 2023 ($99.7 million plus any remaining unallocated amounts)
College Access Tax Credit
This credit is available through the 2022 tax year for contributions made to the College Access Tax Credit Fund. The credit will be available to taxpayers who make cash contributions to the fund and who receive a credit certification and allocation from the California Educational Facilities Authority (CEFA) in the State Treasurer’s Office. The fund will be used to bolster the dwindling resources used to provide Cal Grants to low-income college students. Taxpayers may claim credits for 50% of the amount contributed that is certified and allocated for the 2022 taxable year.
The credit can be used to offset tax, including reducing the tax below the tentative minimum tax.
You must receive a certificate from CEFA before you can claim the credit on your state income tax return. You may also be able to claim a charitable deduction on your federal tax return. If you do this, you must add back the amount of the charitable deduction taken on your federal return as a state adjustment on your California tax return. You cannot claim a deduction and a credit for the same contribution.
The application period for the 2022 taxable year is open until 5 pm on January 2, 2023. You can get an application and more information about how to contribute on CEFA’s website.
AB 150 California Pass-Through Entity Tax (PTE)
California’s AB150 creates an elective tax that allows the taxes on pass-through income to be paid at the entity level. This is a workaround to bypass the $10,000 MFJ ($5,000 Single) Federal salt limitation. For tax years beginning on or after January 1, 2021, and before January 1, 2026, qualified entities (partnerships, limited liability companies with multiple members treated as a partnership, and S corporations) can make an irrevocable election annually on an original, timely filed return to pay the tax on a qualified owner’s share of net income of the qualified entity. Disqualified entities include partnerships or a disregarded entity as an owner of a publicly traded partnership, as well as entities that can be filed under a combined reporting group.
Qualified partners/shareholders must elect to pay the elective tax of 9.3% on their share of net income. Not all partners/shareholders need to elect to take advantage of AB 150. The qualified entity elects to pay the tax on the partners/shareholders’ share of income which results in a deduction on the entity’s Federal income tax return and the partners/shareholders receive a nonrefundable credit that is used to offset their California income tax liability.
Each year, an entity must make two payments. The first payment is due by June 15th of the current year. The amount of the first payment is the greater of 50% of the elective tax paid for the prior year or $1,000. If the first payment is not made by June 15th, then the entity would not be eligible to opt in since there are no exceptions to this, and will miss out on the tax saving opportunity. The second payment will be made by March 15th of the following year, when the entity makes the election to opt in.
These are just some of the year-end steps that can be taken to save taxes for your business. Please feel free to contact our office so we can tailor a plan that will work best for you.
About the Author
David Ha, CPA, Manager
Tax
David Ha is a Tax Manager in the tax department at KROST. David has been in the public accounting profession for over a decade and came from private accounting. His areas of expertise include tax planning and compliance for high-net-worth individuals, partnerships, and corporations. He services clients in various industries including but not limited to cannabis, restaurant, real estate, professional services, and financial services industries. » Full Bio