Year-end is approaching fast, which means this is the perfect time for businesses to make some final adjustments to their tax planning strategies. Exploring options such as a de minimis safe harbor election or purchasing assets to take advantage of 2023’s bonus depreciation of 80% could have a big impact on a business’s tax burden come April. Consulting with a trusted tax professional to determine your eligibility for certain deductible activities is the best way to maximize your tax savings. While this guidance is geared towards businesses, check out our year-end tax planning tips for individuals.
Take Advantage of Charitable Donations
Making charitable donations is not only a good way to raise your company’s profile and connect with your community, it can also lower a business’s taxable income. Pass-through entities like a sole proprietorship, partnership or S-corp, won’t see the benefits as any charitable donation made by those businesses will pass through to your personal tax return. C-corps are allowed to take a deduction on the business for charitable distributions, which can potentially reduce their taxable income. To qualify, the charitable distributions must be made to a qualified charity. Keep in mind that certain forms of donations aren’t deductible, including:
- Political donations
- Donations to universities in exchange for event tickets
- Raffle tickets
- Gifts made to non-qualified charities
Services performed for charitable organizations are also non-deductible, but business owners can deduct the expenses incurred by a business while performing those services. Charitable donations, when done correctly, give businesses not only the opportunity to enjoy potential tax savings, but it’s an important way a company can make a positive impact on their community.
Make Necessary Expenditures and Asset Purchases
For businesses, it’s worth considering buying certain items before the end of 2023. This is especially true for depreciable property that falls under Section 179 business property expensing. Some examples of this property include:
- Computer software
- Interior renovation (excluding enlargement)
- Elevators
- Escalators
- Roofs
- HVAC
- Fire protection
- Alarms or security systems
In 2023, the Section 179 expensing limit is $1.16 million, and the investment ceiling limit is $2.89 million. Additionally, if you purchased machinery and equipment this year and put it into service, you can also claim an 80% first-year depreciation deduction. First-year bonus depreciation was previously always set at 100% but began sunsetting in 2023 and will continue to decrease by 20% each year until it eventually reaches zero in 2027. The first-year deduction for bonus depreciation drops to 60% for 2024, down from 80% in 2023.
Consider a De Minimis Safe Harbor Election
A de minimis safe harbor election is a provision in the tax code that allows businesses to expense certain small-dollar expenditures instead of capitalizing and depreciating them over time. To qualify for the de minimis safe harbor election, a business must have an applicable financial statement, such as an audited financial statement or an applicable financial statement (AFS) that is filed with a government agency) and must have a written accounting policy in place at the beginning of the tax year stating that it will expense certain qualifying expenditures.
The policy must also specify a dollar limit for the expenses to qualify for the safe harbor election. The maximum limit for the safe harbor election is $5,000 for businesses that have an AFS and $2,500 for businesses that don’t have an AFS. It is important for businesses to properly document and track their expenses or invoices to ensure they meet the requirements of the de minimis safe harbor election.
Make Estimated Year-End Passthrough Entity Tax Payments
While the rules are different for every state, passthrough entities, such as partnerships, S-Corporations and sole proprietorships, should consider making an estimated passthrough entity tax payment before the end of the year. Doing so could provide an additional tax deduction for some taxpayers and also help them avoid costly underpayment penalties.
Look into Qualifying for the QBI Deduction
The QBI deduction, also called the “20% Business Deduction,” is a great tax planning strategy. To make the most of this deduction, it’s important to consider year-end bonuses carefully and make decisions about whether to accelerate or defer income/expenses. The QBI deduction comes into play at the individual level, not the entity level, so C-corps aren’t eligible for the deduction.
To initiate the process, taxpayers should gather all relevant financial records, including income statements, expense receipts and depreciation schedules. They should then consult a tax professional to accurately determine if they qualify for QBI and any specific deductions or credits associated with it.
Anders Tax advisors work with businesses on customized tax strategies to reach their highest potential. To learn more about our tax services and the associated costs, request a meeting with an Anders advisor below.
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