Dear Clients and Friends:

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022. The Act extends many energy related tax credits through 2024 including the credit for electricity produced from certain renewable resources; the energy credit; and other energy-related credits (with various extension dates).  The Act also introduced a couple of new corporate taxes and various clean energy related tax credits beginning 2023.

Income and Tax Rates

  • It might make sense to look at ways that we can defer income or accelerate deductions for 2023.  The final months of the year provide an important “last chance” to change the final course for the entire tax year before it closes for good.  Initiating traditional techniques designed to accelerate deductions and delay income can yield substantial tax savings.
  • The corporate tax rate remains unchanged at 21 percent.
  • New Corporate Taxes for 2023
    • 15% corporate alternative minimum tax rate on adjusted financial statement income for applicable corporations
    • 1% excise tax on the repurchase of corporate stock.

Depreciation / Expensing

  • For 2023, the bonus depreciation limitation decreases from 100% to 80% of the adjusted basis of qualifying property. The limitation percentage will continue to decrease in 2024, 2025, 2026, and 2027 to 60%, 40%, 20%, 0% respectively.
  • The Section 179-dollar limitation is set at $1,160,000 with the investment limitation phase-out beginning at $2,890,000. Although the difference between bonus depreciation and Code Section 179 expensing would now be narrowed if both offer 100-percent write-offs of new or used property, some advantages and disadvantages for each will remain.  For example, Code Sec. 179 property is subject to recapture if business use of the property during tax year fall to 50 percent or less; but Code Sec. 179 allows a taxpayer to elect to expense only particular qualifying assets within any asset class.

Deductions

  • NOLs
    • Post 2020 NOLs may not be carried back (except for farm losses), but may be carried forward indefinitely.
    • Starting with the 2021 tax year, the NOL deduction is limited to 80% of taxable income (excluding the NOL or qualified business income deduction)
  • Interest deduction has been capped at 30 percent of adjusted taxable income, among other criteria.  Exceptions exist for small businesses, including an exemption for business groups with average gross receipts of $29 million or less.
  • SALT (PTE) Deduction. Some shareholders of S-corporations and partners in partnerships my be subject to the $10,000 state and local tax limitation when itemizing deductions. In order to work around this limitation, some states have enacted laws giving S-corporations or partnerships the option of paying state taxes at the entity level, thus reducing the amount of federal income flowing out to the shareholders and partners.

Pass-Through Income Deduction

Noncorporate taxpayers may deduct up to 20 percent of domestic qualified business income from a partnership, S corporation, or sole proprietorship (Code Sec. 199A deduction).  A limitation based on wages paid, or on wages paid plus a capital element, is phased in for taxpayers with taxable income above $364,200.  The deduction is further limited for certain service trades or businesses such as accountants, doctors, lawyers, etc.

Credits

  • Solar Energy Tax Credits
    • Investment Tax Credit. Credit reduces the federal income tax liability for a percentage of the costs of a solar system installed during the year.
    • Production tax credit. The credit is a kilowatt-hour tax credit for electricity generated by solar and other qualifying technologies for the first 10 years of a systems operation.
  • R&D Tax Credit

Miscellaneous

  • If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
  • For certain LLCs, you may want to consider the benefits of various S-Corporation structures to reduce the effect of the 0.9% Medicare surtax.

This list highlights some of the many planning strategies that can be taken to save taxes. Effective tax planning requires a long-term strategy, with frequent reviews and adjustments along the way. A tax plan catered to your specific situation has the potential to save you significant tax dollars, so please contact us today to set-up a year-end tax review.