Year-End Tax Tips for Business Owners: 7 Considerations That Could Impact Your Return

While Congress did not pass many new provisions impacting 2023 or 2024, there are still many changes from past legislation that became effective in 2023 or will become effective for subsequent tax years. Some of the changes made and other business planning opportunities that may impact your taxes in 2023:

Employee Retention Credit

The Employee Retention Tax Credit (ERTC) was originally enacted as part of the CARES Act in March of 2020. It was introduced to encourage employers to retain employees during the pandemic. As time passed the credit has been increasingly and aggressively marketed to businesses that don’t qualify for it. On September 14, 2023, the IRS announced that the processing of new claims for the ERTC would be immediately halted in an effort to combat fraud; anyone who improperly claims the ERC must pay it back, possibly with penalties and interest.

Section 179 & Depreciation Expense

The Section 179 deduction limitation increased to $1,160,000 for the 2023 tax year; the deduction phase-out begins once the amount of Section 179 property placed in service during the tax year exceeds $2,890,000. Generally, property that can be expensed via the Section 179 deduction includes new or used machinery and equipment. It also includes off-the-shelf software, qualified improvements to building interiors, roofs, HVAC systems, fire protection systems, alarm systems, and security systems.

In addition to Section 179, the first-year bonus depreciation deduction is still in place. For 2023, the bonus depreciation deduction has been decreased from 100 percent to 80 percent and will continue to decrease in increments of 20 percent in subsequent tax years. Without any new legislation, it will be completely phased out after 2026. Qualifying property is tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less; most computer software; qualified film, television, and live theatrical productions; and water utility property. Property purchased may be new or used if acquired from an unrelated party.

Business Interest Limitation

The business interest limitation applies to businesses with three-year average gross receipts over $29 million for 2023. The deduction for net business interest expense is limited to 30 percent of the adjusted taxable income. Adjusted taxable income does not include additions for depreciation or amortization, which may have a significant impact on the deductibility of business interest. If the interest deduction is limited, the excess interest expense will carry forward to future years.

The business interest deduction limitation does not apply to interest paid by vehicle dealers on carried inventory. In addition, some real estate businesses are able to opt out of the interest limitation by making an election to forgo accelerated depreciation methods.

Meals & Entertainment

The Tax Cuts and Jobs Act of 2017 brought major changes to deductions for meals and entertainment. The temporary incentive to deduct 100 percent of food and beverages purchased from a restaurant expired January 1, 2023, and the rules have reverted to an allowable 50 percent deduction for most business meals.

Qualified Business Income Deduction

The qualified business income deduction (QBID) is a deduction for individual taxpayers, including trusts and estates, who operate a qualified trade or business as a sole proprietorship, partnership, or S corporation. The amount of the deduction is up to 20 percent of the income and gain, reduced by deductions and losses, of a qualified trade or business. The deduction is subject to phase-out limitations if the trade or business is considered a specified service business. For 2023, the phase-out begins when taxable income reaches $364,200 for married taxpayers filing jointly, or $182,100 for single taxpayers or heads of households.

Research & Development Expenditures

Pending potential legislation, research and development (R&D) expenditures incurred or paid in the 2023 tax year must be capitalized and amortized over a five-year period (domestic expenditures) or a 15-year period (foreign expenditures).The requirement also applies to internally developed software and website development costs. Amortization will be required even if the R&D projects are abandoned, retired, or disposed of prior to the end of the amortization period.

Section 1031 Like-Kind Exchanges

The like-kind exchange rules provide taxpayers the benefit of deferring taxes on gains from the disposal of investment or business real property, allowing taxpayers to roll the basis of the real property over into like-kind property. While prior law allowed like-kind exchange benefits for other types of investment or business property, current law has limited like-kind exchange treatment to real property. To qualify for like-kind exchange treatment, a taxpayer must identify both the relinquished property that is exchanged as well as the replacement property acquired in the exchange. The rules for like-kind exchanges have specific timing requirements to ensure all aspects of the exchange have been carried out within the prescribed timeline.

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.