“Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your attorney, CPA, and/or other advisors regarding your specific situation.”
The phrase "tax planning" often garners significant attention in social media posts and generates enthusiasm among many individuals, although it frequently leads to limited tangible outcomes. The primary reason for this is that the majority of people tend to focus on tax planning only during the tax return filing period in March or April. More seasoned business owners understand that tax planning is an ongoing activity, and reviewing your tax plan at the end of the year is paramount to taking advantage of opportunities. In this article, we will discuss considerations from recent tax policy and opportunities to minimize your tax bill.
Recent Legislation: Corporate Transparency Act (CTA)
The Corporate Transparency Act (CTA), set to take effect on January 1, 2024, is a significant piece of legislation impacting small business owners. Here's what you need to know:
Purpose of the Act: The CTA was enacted to enhance transparency in business entity structures and ownership. Its primary goals are to combat illicit activities such as money laundering, tax fraud, and other similar activities.
Reporting Requirements: The CTA mandates that certain businesses report specific information to the Financial Crimes Enforcement Network (FinCEN). This includes details on individuals with “substantial control” over the business or those holding 25% or more equity in the business.
Who Must Comply: The CTA applies to “reporting companies,” which includes most small corporations, limited partnerships, and LLCs. In plain english, businesses with less than $5 million in annual sales and fewer than 20 employees.
Deadline to File: A reporting company created before January 1, 2024 must file a report no later than January 1, 2025. A reporting company created on or after January 1, 2024 must file a report within 90 calendar days. If there is a change with respect to required information previously submitted to FinCEN, the reporting company must file an updated report within 30 calendar days after the date on which the change occurs.
Who is responsible for filing the report: FinCEN states that the reporting company is ultimately responsible for filing the report. A tax advisor may be engaged for professional help, but be prepared for increased professional fees.
Cost of Living Adjustments
Standard & Itemized Deduction
The standard deduction for 2023 has been raised to $27,700 for married couples filing jointly, and $13,850 for single filers. To deduct state and local taxes, medical expenses, charitable giving, and home mortgage interest you will have to have expenses over the standard deduction. Each of these categories are also subject to their own limits.
Retirement Planning
Contributions to 401(k) plans were increased to $22,500 in 2023, and $23,000 in 2024. IRA contributions were increased to $6,500 in 2023, and $7,000 in 2024. Individuals who are age 50 and over at the end of the calendar year can make annual catch-up contributions in the amount of $7,500 in 2023 and 2024 for a 401(k), and $1,000 for an IRA in 2023 and 2024.
Health Savings Accounts
For those covered under a high deductible health plan (HDHP), you can contribute to a health savings accounts (HSAs) in the amount of $3,850 for self-only coverage and $7,750 for family coverage in 2023. In 2024, the contribution to an HSA has been increased to $4,150 for self-only coverage and $8,300 for family coverage.If you are 55 or older at the end of the year, you can put in an extra $1,000 in “catch up” contributions for both 2023 and 2024.
Gift Tax
The annual gift tax exclusion was increased to $17,000 for 2023, and will be $18,000 for 2024.
Increased Penalties & Interest
On Oct. 1, the interest on tax underpayments rose to a stiff 8% and may hold there. To avoid underpayment penalties & interest, taxpayers must pay in 90% of their current year taxes, or 100% of their prior year taxes (110% for those earning over $150,000). The due date is Dec. 31, 2023 for employees and Jan. 16, 2024 for those making quarterly payments. The IRS has posted a calculator to help taxpayers figure the right amounts.
Maximize Your Business Deductions (for Independent Contract Workers Too!)
When a business owner or independent contractor has a profit motive, they are allowed deductions against their business income that are “ordinary and necessary.” This is a big advantage over employees who have limited ways of reducing their earned income. The key to properly using business deductions to lower your taxes is to record the expense and save the receipt.
You do not need a legal entity to take business deductions on your tax return. If you are operating as an independent contractor under your personal name, or as a sole proprietorship, you are allowed to take deductions to offset business income from that activity.
Business Miles
Business miles are deductible at 65.5 cents per mile for 2023 (the 2024 rate is TBD). Commuting miles between your home and office building are not considered business miles.
Home Office Deduction
If your primary place of business is a home office for one of your business activities, you may qualify for the home office deduction. For example, if you work a W-2 job in an office, but you have a home office for your real estate LLC, then it will count as your primary place of business for that activity.
The second requirement is that the space in your home that you use as your home office must be used exclusively for business. Lastly, you do not need to own your home to take the home office deduction.
The deduction can be calculated as the business portion of actual expenses (make sure to have documentation) or the simplified method, which is $5 per square foot up to $1,500 (300 square feet). If you choose to use actual expenses, the transactions eligible for the deduction include mortgage interest, property tax, HOA fees, homeowners insurance, utilities, phone service, internet, maintenance, repairs, home improvement costs, and security. Keep in mind, when you take a home office deduction using the actual expense method for mortgage interest and property taxes, this reduces the amount reported as itemized deductions.
S Corporations
Highly profitable LLCs may benefit from electing to be taxed as an S Corporation. An S Corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes, avoiding the double taxation on corporate income. This type of entity can be beneficial for business owner’s paying high self-employment taxes. It is important to be aware of the many administrative requirements of an S Corporation and they do have large disadvantages when it comes to owning rental real estate.
A cost benefit analysis should be run before electing S Corporation status.
Opportunities to Reduce Capital Gains Taxes
Taxpayers should consider whether they can minimize their tax bill on capital gain income by considering the timing of their gain. Short-term capital gains (assets held for less than 1 year) are taxed as ordinary income, while long-term capital gains are taxed at preferential rates. Ideally, gains should be received in the year with the lower marginal tax rate, or when they can be offset by losses. Actions to consider that may result in a reduction or deferral in taxes include:
Delaying the sale of an asset until you have held it for at least one year to trigger preferential tax rates on your gain.
Delaying the sale of an asset to a year where you will be subject to the 0% long-term capital gains rate (2023: income less than $44,625 for single filers, and less than $89,250 for those filing jointly).
Structuring the sale of an asset as an installment sale to defer capital gains tax (a good strategy if you will be subject to 0% capital gains tax in the future and you do not have current needs for the proceeds).
Considering whether to trigger capital losses before the end of the year to offset gains.
Taxpayers who expect to be in a higher tax bracket in 2024 may want to consider potential ways to move capital gains into 2023, such that the taxable income is taxed at a lower rate.
Electric Vehicle Credits
Taxpayers who purchased an electric vehicle in 2023 may qualify for a credit up to $7,500. The credit is available to individuals and their businesses if you own it for your own use (not for resale), use it primarily in the US, and your income does not exceed $300,000 for married couples or $150,000 for single filers.
There are vehicle qualifications to go over with your tax advisor, so be sure that they have been communicated the vehicles you are considering so they can let you know how much of the credit you will be able to claim.
Lastly, the credit is nonrefundable (you cannot get back more on the credit than you owe in taxes) and does not carry forward to future years.
Beginning Jan. 1, 2024, taxpayers may have the option to transfer the credit to the dealer at the point of sale. This means that eligible dealerships would be able to either lower the cost of the vehicle by the corresponding credit amount or provide the consumer with a cash equivalent. The proposal is currently undergoing a public commentary period, more guidance is expected.
State Pass-Through Entity Tax
A majority of states have enacted state Pass-Through Entity Taxes (PTET) in an effort to eliminate the negative impact of the $10,000 state and local tax (SALT) cap put in place by the Tax Cuts and Jobs Act (TCJA 2017).
These rules allow a pass-through entity such as a partnership LLC or S Corporation to opt to pay state income tax at the entity level, rather than the individual level. This allows the partners, members, or shareholders to lower their federal taxable income and receive a credit for the taxes paid on their state tax return.
The IRS has blessed this process however, the decision to pay PTET does not make sense in every scenario. It is important to consider this opportunity with the help of a tax professional. It is exciting for owners of pass-through entities to have the potential to reintroduce the SALT deduction to their tax saving strategy, but care and attention to detail is required for proper execution.
IRS Account to check and manage your tax information
The IRS now offers a sign-in option with “ID.me” where you will have access to IRS online services with a secure account that protects your privacy. There are currently two ways to verify your identity and obtain an account. You can either use a self-service process that requires a photo of a government ID and a selfie, or a live call with an ID.me video chat agent that doesn’t require biometric data.
The benefits of having an account with the IRS directly are to:
View key data from your most recently filed tax return (Adjusted Gross Income, Transcripts, etc.)
View information about your Economic Impact Payments or advanced Child Tax Credit (currently expired but may come up again in the future)
View digital copies of certain notices from the IRS
Verify payments have been received (such as checks that were mailed or payments made on the IRS Direct Pay website)
The IRS collecting biometric data has received backlash as activist groups and lawmakers from both parties have said that this process is an invasion of privacy. It is important to remember that the IRS must have the strongest data security protocols and it is most likely that data security experts advised the agency that facial recognition is safer than providing websites with other identifying information (social security cards and personal documents), and that the technology is already widely used in places such as airports.
If the benefits provide the insight and clarity into your tax profile that you’ve been looking for, and you are comfortable with facial recognition technology, this is a huge step in the right direction. If you’re more cautious about sharing biometric data with a government agency, you should consider the live interview or wait until other options are added.
Areas of IRS Focus
Employee Retention Credit claims have been paused until at least 2024 due to a wave of fraudulent and overstated claims from the pandemic-era tax break. The IRS will allow employers with pending claims to withdraw them and will let many repay their refunds if they no longer think they qualify. Many businesses were scammed by “ERC Mills” who sent businesses aggressive pitches that promised large refunds even when the business did not qualify for the program. It is important for business owners and accountants to regularly review the IRS Dirty Dozen to stay ahead of tax scams.
Social Media is new on the 2023 IRS Dirty Dozen. We also wrote a blog post about this earlier in the year. Unfortunately, tax advice has proven to be a way for social media influencers to get likes and grow their page. Often times, these people have no professional license and do not report to any professional board, so they say whatever will get people interested. Many times the strategy they share will either be only applicable to a small niche of taxpayers, more expensive than the tax savings, or flat out wrong. You should be using a tax advisor that you trust is looking out for you and considering all of your options, not one where you feel the need to send them social media posts. Also, always remember that tax savings are icing on the cake. Do not make a bad investment just to save money on taxes.
Cybersecurity: The IRS now requires e-filing of certain partnerships and recommends e-filing to be the best way to file an accurate and complete tax return. Tax advisors should also have a Written Information Security Plan in place, and take measures to protect client data (which may include ending the collection of paper documents).
Your tax advisor should be a part of your financial team by communicating transactions and questions you have with them. Procrastinating and poor record keeping is a recipe for overpaying on your tax bill in any year. On the contrary, most taxpayers are surprised to see how much organized records, good bookkeeping, and timely communication can save them on taxes.
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