The end of December is barreling down for calendar-year business filers, but owners can still try to trim their tax bill. NJBIZ spoke with some accounting and tax experts to get the latest insights.
Start by considering whether your business is eligible for the Employee Retention Credit, suggests EY US East Region Tax Managing Partner Martin Fiore. “Also, is there an opportunity for you to review your state tax profile, with apportionment and allocation of income to various states that can be appropriately sourced to a lower tax jurisdiction? And consider filing refund or protective refund claims for expiring tax years under COVID-19 relief legislation, such as the Coronavirus Aid/Relief and the Economic Security (CARES) Act of 2020 for calendar year 2020.”
Other items on his business checklist include reviewing “accounting methods to determine whether accelerating deductions or deferring income is feasible,” particularly under Internal Revenue Service Section 451 regulations, which lay out the timing for recognizing gross income. And, he noted, business taxpayers who engaged in a sale of 1202 – or small-business – stock may be eligible for a partial exclusion of gain.
With the economy in flux, business owners should review their company’s performance and reconsider their estimated tax payments and other issues, pointed out Cristina Sousa, managing director, Tax – Private Enterprise/Family Office, KPMG. “Cash is king in a recession, so if your income is down consider annualizing estimated tax payments versus utilizing the IRS annual estimated tax payment safe harbor,” she said. “With the current environment and future economic outlook, it is almost essential to tax loss harvest. In other words, offsetting capital gains with capital losses, which will reduce tax effective rates and better position portfolios going forward.”
Being generous to loved ones can also make good economic sense, she added. “Contributing gifts of appreciated stock not only eliminates individual long term capital gains rates, but also the net investment income tax rate of 3.8%; while also giving you an individual income tax deduction on the [fair market value] of the contribution. If asset values are down it is also a good time to utilize your annual gift exclusion to transfer wealth and or your lifetime exemption before changes occur after Jan. 1, 2025.”
Other professionals also offered suggestions. “With no major changes in tax rates expected this coming year, the general advice still holds,” said Louis Miele, a partner with Aprio. “If possible, defer income to a future year, and recognize expenses this year.”
But taxpayers should “be aware of ‘wash sale’ rules,” cautioned Steven Podobinsky, Aprio tax director. “They generally prohibit loss recognition when an investment is sold at a loss and is replaced with the same or a ‘substantially identical’ investment 30 days before or after the sale.”
Podobinsky added that the federal Qualified Business Income (QBI) deduction generally allows eligible self-employed and small-business owners of non-C corporations – such as partnerships, S corporations, single member LLCs, and sole proprietors in certain trades or businesses – to deduct up to 20% of their business income, subject to certain limitations, from being taxed.
There are “plenty of proposals for Tax Code modifications, but it is very difficult to get substantial legislation passed right now,” according to Eddie Rivera, a partner at Sax LLP. “But we do know that bonus depreciation rate [which generally allows businesses to immediately deduct a large percentage of the purchase price of eligible assets, such as machinery, instead of writing the cost off against income over the ‘useful life’ of the asset] is scheduled to be curtailed beginning in 2023. So, business owners may want to consider accelerating the purchase of certain capital assets.”
But it’s not necessarily a slam-dunk decision, he added. “When we sit down with clients for an income tax planning session, we don’t look at income taxes as a silo,” Rivera said. “Instead, it’s important to take a holistic view and integrate their income tax planning with their retirement, estate and trust and other business and personal planning.”
Specifics of tax strategies vary by individual and business, but some approaches are a “no-brainer,” according to Dan Gibson, a tax partner in EisnerAmper’s Private Client Services Group. “If you were planning to buy assets next year anyway, consider accelerating the purchase and placing it in service before Dec. 31, 2022,” he said. “You may be able to take the 100% ‘bonus depreciation’ expense – which is scheduled to phase out starting Jan. 1 – instead of writing off the expense over multiple periods.”
The close of the calendar year is also a good time to consider whether a sole proprietor filing a Schedule C with their individual tax return might be better served by electing to treat the entity as an S Corporation, Gibson said, referring to a Subchapter S corporation that elects to pass corporate income, losses, deductions and credits through to shareholders for federal tax purposes.
“Many people start out with Schedule C since it’s easier to launch and, if needed, to dissolve,” explained Gibson. “But if the company grows, then all of the Schedule C income is generally subject to income tax and self-employment tax. In contrast, a Sub S owner may be able to withdraw the same amount of cash but avoid some self-employment tax by structuring some of the cash-out as a distribution instead of salary. Also, Schedule C filers with significant income tend to be audited more, since the IRS assumes the owners are less sophisticated and are more likely to co-mingle business and personal activity.”
As the clock runs out on 2022, business owners may have to make some big decisions, according to Wiss & Co. LLP Senior Tax Manager Nicole DeRosa, who noted that claiming a COVID-related tax credit, or dollar-for-dollar reduction against a business’ federal income tax liability, is one option. “Officially, the Employee Retention Tax Credit program has expired, but qualified businesses may still be able to claim the ERTC on a retroactive basis,” she explained. “Generally, businesses have up to three years from the date the original return was filed to amend IRS Form 941 to claim the credit – generally Sept. 30, 2021, although wages paid through Dec. 31, 2021, for certain businesses were eligible – to determine whether wages paid after March 12, 2020, through the end of the program are eligible for the ERTC.”
The credit is valuable, but the calculations can be complex. Some third-party providers offer to do the math for a commission or other fee, but DeRosa said to be careful. “There are legitimate providers, but some outfits – especially ones that charge a commission based on a percentage of the credit a company will get – may be pushing the boundaries,” she warned. “These credits are likely to be audited down the road so any company claiming the credit should make sure to ‘dot their Is and cross their Ts’ before signing up for the services, it would certainly be a good idea to understand the fee/cost structure first.”
For Michael Karu, senior member of Levine Jacobs & Co. LLC, timing is everything. “Bonus depreciation is still in effect until Dec. 31 of this year, so a business owner who is planning to buy qualified assets early in 2023 may want to accelerate the purchase to this year,” he said. “Even if you’re financing the purchase and paying it off over multiple periods, you can generally take the full write off this year.”
Even without bonus depreciation, another IRS code provision, Section 179, may offer similar write offs, “but some states limit the deduction [the limit is $25,000 in New Jersey],” Karu cautioned. “Business owners may also consider setting and funding certain kinds of pension plans [like defined benefit plans, where businesses generally contribute – and deduct – more each year, compared to defined contribution plans], but consider whether you have to include employees in the plan. Depending on your cash flow, if the bulk of the contributions will go to the owner – and it doesn’t run afoul of ‘top-heavy’ restrictions – a DB plan may make sense.”v