The year 2023 has indeed presented a unique set of challenges for business owners. It has required adaptability as they navigate political uncertainties regarding U.S. tax policies. Additionally, business owners have had to grapple with macroeconomic factors such as heightened inflation, rising interest rates, concerns about a potential recession, and complex geopolitical issues. The proposed tax changes outlined in President Joe Biden’s 2024 budget plan have added another layer of uncertainty, with discussions about increased corporate income tax rates, alterations to capital gains, taxation for high-income earners, and revisions to estate and gift tax provisions. While this may seem like a lot to absorb, it’s important to note that business owners can leverage recently enacted tax incentives to drive their businesses forward.
CURRENT TAX ENVIRONMENT HIGHLIGHTS:
- For pass-through business structures, corporate income tax rates are contingent upon the individual income tax brackets of the business owners. These brackets encompass rates ranging from 10% to 37%, depending on the level of personal income generated.
- The corporate tax rate is 21%.
- Long-term capital gains and qualified dividends for individuals are subject to distinct maximum tax rates, which include 0%, 15%, or 20%.
- Corporate capital gains are typically treated as ordinary income, taxed at a rate of 21%.
- Individuals may be subject to a 3.8% Medicare surtax on their net investment income. However, exceptions apply to certain business structures such as sole proprietorships, partnerships, or S corporations.
Now, let’s explore 9 year-end tax planning strategies tailored for business owners. Keep in mind that your business and planning circumstances are unique. To determine the most suitable strategies for your specific situation, it is essential to consult with your tax and financial professionals.
1. Maximize Deductions for Business Expenses and Pass-Through Business Income
Scrutinize your business expenses throughout the year to ensure you capitalize on all available deductions. This encompasses expenses related to office supplies, equipment, business travel, and professional services. Maximizing deductions is instrumental in reducing your taxable income.
The qualified business income (QBI) deduction, available until 2025, offers a valuable tax benefit to eligible owners of qualified pass-through entities. There is an opportunity to claim a deduction of up to 20% of QBI. In 2023, this deduction becomes accessible to specified service businesses if their taxable income is under $182,100 for individual filers or $364,200 for married couples filing jointly. Effectively harnessing the QBI deduction necessitates careful management of taxable income. This can be achieved through strategies like accelerating deductions, deferring income, and addressing the wage/capital limitation. These measures can help reduce taxable income, potentially leading to significant tax savings.
2. Explore Depreciation and Amortization
Investigate opportunities for depreciation and amortization of your business assets. Some assets may qualify for accelerated deductions, effectively reducing your taxable income.
A tax strategy to highlight is bonus depreciation. Business owners often choose the bonus depreciation deduction when acquiring new or used machinery and equipment, offering immediate tax savings in a cost-intensive environment. In 2023, an 80% bonus depreciation is available for new and used equipment purchased and placed in service within the calendar year and then you can depreciate the remaining 20% over several years. It’s essential to keep in mind that this bonus depreciation tax strategy is gradually phasing out, concluding in 2026.
Consult with your accountant or tax advisor to pinpoint eligible assets.
3. Evaluate Retirement Plan Options
Evaluating retirement plan options is essential for optimizing tax management and financial security. Business owners and employees can use this time to maximize contributions and utilize any available company matches in their retirement plans. For individuals with Roth options, assessing current and future tax rates is critical. If your future tax rate is projected to be higher in retirement, allocating contributions to the Roth option, despite the lack of immediate tax deductions, can be a smart consideration.
Year-end also provides businesses the opportunity to extend bonuses or retirement contributions to employees, offering potential tax advantages. To maximize contributions up to the legal limit, business owners may need to create a strategic plan, leveraging options like simplified employee pension (SEP) IRAs for self-employed individuals or solo 401(k) plans for various business structures. Profit-sharing contributions can further reduce taxable income as well.
Consult with a tax advisor to understand how to best approach these strategies. Also, review our blog on Secure Act 2.0.
4. Assess Your Entity Structure and Tax Status
The structure of your business – be it a sole proprietorship, partnership, LLC, S corporation, or C corporation – exerts a substantial influence on your tax liability. It is imperative to periodically evaluate whether your existing structure optimally aligns with your business and personal tax efficiency.
5. Probe Tax Credits
Probe potential tax credits that your business qualifies for. Depending on your industry and activities, you might be eligible for credits related to research and development, or hiring employees from specific groups, among others.
In addition to exploring tax credits your unique business might qualify for, in today’s business environment, there’s a heightened emphasis on environmental, social, and governance (ESG) factors for business owners. It’s wise to explore the available tax credits and incentives linked to clean commercial vehicles and energy-efficient improvements. Furthermore, maximize the benefits offered by expanded tax credits for research and development, particularly those tailored for small businesses. These initiatives not only contribute to your sustainability goals but also offer valuable tax advantages.
6. Review Your Estimated Tax Payments
Guarantee that your estimated tax payments throughout the year correspond to your actual income and expenses. Fine-tuning your payments ensures you evade underpayment penalties and the risk of overpaying the government.
7. Succession and Business Transition Planning
Planning your business transition is vital for owners, yet often takes a back seat to daily operations. Neglecting this crucial aspect can significantly reduce the value your family receives when you sell. Regardless of whether you plan to pass on your business to family, employees, or an external party, proactive planning is key to achieving your transition goals. Regularly review and adjust your exit plans to ease the tax burden and enhance your business’s overall value, ensuring a smooth transition.
8. Wealth Transfer
The ambiguity in tax policy has generated uncertainty for business owners, leading many to proactively establish trust and tax plans to protect their assets from prospective alterations in tax laws. Adding to these challenges is the upcoming reduction in the federal estate gift tax exemption (FEGTE) in 2026, which will decrease the exemption from $12.92 million to an estimated $6-$7 million depending on inflation. It’s crucial to establish or update wealth transfer planning strategies aimed at minimizing both federal and state income and transfer taxes. Utilizing techniques like annual exclusion gifts and long-term trusts can be effective in maximizing savings on income and transfer taxes. Also, this further highlights the importance for business owners to review their corporate structures and business transition strategies.
In Conclusion: Seek Professional Guidance Because Tax Planning is Crucial and Complex
Effective tax planning is a vital component of maintaining your personal and business financial well-being. As the year-end approaches, now is an ideal time to evaluate your financial situation and put these tax planning strategies into practice. Given the intricate and ever-changing nature of tax laws, it is highly recommended that you seek the counsel of your tax professional, legal advisors, and financial experts to receive tailored guidance, ensuring that your business capitalizes on the available tax-saving opportunities. If you don’t already have a dedicated professional advisory team, feel free to reach out to Tiffany Charles at firstname.lastname@example.org. She will be delighted to connect with you and facilitate introductions to essential professionals who can provide you with the support you need.
If you have a question or simply want to talk through your financial planning, we are here to help.
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DISCLOSURE: Jarrod Musick is an officer of Destiny Capital and Entrepreneur Aligned, a DBA of Destiny Capital. This article is for informational purposes only and should not be relied upon as a basis for your investment, business, or personal financial decisions. We recommend consulting with your wealth advisor, CPA/tax advisor and/or attorney, as applicable to your situation, prior to implementing any new tax, legal, or investment strategy. Advisory services provided by Destiny Capital Corporation, a Registered Investment Adviser.
Jarrod was born into financial planning and solving financial problems. With his financial advisor father Steve telling stories about finance around the dinner table from an early age, the idea that everyone has a different financial situation was always there. After an early professional career spent in nonprofit and government, Jarrod came back to his roots helping people plan and invest in 2011. Since then, he has worked with individual clients, led internal teams and ultimately became partner and the CEO of Destiny Capital in 2017. With a passion for helping entrepreneurs change the world, Jarrod ultimately oversaw the creation of Entrepreneur Aligned in 2020. With both Destiny Capital and Entrepreneur Aligned, Jarrod leads teams that help people live lives of abundance where money is simply a tool to let everyone be a positive force for the world around them. When he isn’t working with the talented teams for EA and DC you can find him chasing his twins, wily trout or a podium spot at an OCR race.