Are You Ready for Tax Filing Season?

As we near the end of the year, we are getting increasingly more inquiries about the information required for filing 2023 returns and the tax law changes that will impact those returns. The following information is in response to some of the more common concerns:

Expired Tax Provisions

A number of tax provisions impacting business returns have expiration dates:

• 100% Bonus Depreciation Phase-Out: The Tax Cuts and Jobs Act allowed for a 100 percent bonus depreciation deduction for qualifying assets placed in service, such as furniture, equipment, and vehicles. The bonus percentage decreases by 20 percent per year starting with 2023; it will be completely phased out by 2027, meaning that for assets placed in service between January 1, 2023 and December 31, 2023, 80 percent bonus depreciation is allowed. The phase-out period doesn’t begin until 2024 for certain property with a long production period.
• 100% Deduction for Restaurant Business Meal Expenses: The full amount allowed for deduction in 2021 and 2022 for certain business meals provided by restaurants expired on January 1, 2023. In 2023, a business can deduct only 50 percent of the cost of business meals.

Other provisions that may impact your business return include:

• The Employee Retention Credit is no longer active, but retroactive credits may be claimed on amended payroll tax returns.
• Research and development expenditures can no longer be expensed, and instead must be amortized under IRC § 174.
• Depreciation, amortization, and depletion do not get added back to the calculation of adjusted taxable income for the limit on business interest expense under IRC § 163(j).

Deductions for weather-related losses

Many people and businesses were impacted by severe weather in 2023. Deductions are allowed for three types of losses related to events officially declared by the Federal Emergency Management Agency (FEMA):

• Federal casualty loss: personal losses attributable to a federally declared disaster
• Disaster loss: business or personal losses attributable to a federally declared disaster in an area eligible for assistance pursuant to a presidential declaration; deductible either in the year of the disaster or the preceding year
• Qualified disaster loss: business or personal losses attributable to disasters as specifically identified in legislation passed by Congress

In general, the amount of loss you can deduct is the lesser of the decrease in fair market value of the property and the adjusted basis in the property immediately before the casualty occurred. That loss is then offset by any insurance or other reimbursements you receive. Federal casualty losses and disaster losses may only be deducted to the extent they exceed $100 per casualty and 10 percent of the individual’s adjusted gross income (AGI). Qualified disaster losses are not subject to the 10 percent AGI limitation, but can only be deducted if they exceed $500 per casualty.

Foreign Considerations

As the economy becomes more global, more taxpayer investments include foreign activity. Since noncompliance with the foreign reporting requirements may result in significant penalties, you should carefully review your assets and investments for foreign asset activity that could require special reporting.

In particular, pay attention to the following:

• Foreign bank or brokerage accounts may require reporting if the total value exceeds $10,000.
• Foreign retirement accounts could be treated as foreign trusts requiring additional reporting.
• Investments in foreign partnerships may result in additional reporting under the passive foreign investment company (PFIC) rules.
• Investments in foreign corporations may require additional reporting under the Controlled Foreign Corporation (CFC) rules.
• Beneficiaries of foreign trusts or estates may be subject to additional reporting when distributions are received.
• Gifts or inheritances received from a foreign individual may be subject to additional reporting if the amount received exceeds a certain threshold.

If you are unsure whether an asset, investment, or item of income might be subject to foreign reporting, consult your tax advisor for guidance.

Lowering your taxable income

It is always a good idea to examine ways to lower your taxes, and perhaps even your tax rate, by lowering your taxable income. A couple of opportunities to consider:

• Tax-loss harvesting: Do you have investment losses? They can be used to offset investment gains as well as up to $3,000 of your income. Work with your investment advisor to determine depreciated securities you might sell before the end of 2023.
• Tax-advantaged accounts: Contributions to your 401(k), 403(b), or a health savings account could lower your taxable income as well as provide additional retirement or healthcare assets you can use later. Work with your advisor before year-end to ensure you’re contributing up to the limits allowed.

Tax reporting and compliance grow more complicated each year. Make sure you gather your tax documents carefully and reach out to your tax advisor with any questions or if you are unsure about how certain items could impact your return.

We’re here to help. To talk with an HBK tax professional, call (330) 758-8613.