2023 Business Planning Guide

December 7, 2023

This Guide outlines strategies that may help lower your tax bill. However, careful planning involves more than just focusing on lowering taxes for the current and future years. Each potential tax savings opportunity must be considered in the context of its effect on your entire business. In addition, tax planning for closely-held business entities requires a delicate balance between planning for the business and planning for its owners. WellsColeman is available to answer any questions or help you with your planning needs.

Virginia Pass-Through Entity Tax

During the 2022 session, the Virginia General Assembly enacted the Virginia Pass-Through Entity Tax option, which permits a qualifying pass-through entity (PTE) to make an annual election to pay income tax (the pass-through entity tax or PTET) at a rate of 5.75% at the entity level. The legislation also allows a corresponding refundable income tax credit to certain PTE owners for the elective income tax imposed at the entity level. In addition, eligible PTEs that make this election will be able to deduct the state tax payment from their federal business tax return in the year a payment is made as long as an electronic payment of the PTET is made by December 31, 2023.

Qualifying pass-through entities include:
Limited partnerships
Limited liability partnerships
General partnerships
Limited liability companies
S corporations

The election is officially made each year by filing the new PTET form, Virginia Form 502PTET. Once filed (either by the original or extended due date), the election for that tax year is binding. Individual owners will not have an option to opt out of an entity’s election with the Virginia Department of Revenue once the Form 502PTET has been filed.

Consider Tax Accounting Method Changes

More small businesses are eligible to use the cash (as opposed to accrual) method of accounting in earlier years. To qualify as a small business, a taxpayer must, among other things, satisfy a gross receipts test. For 2023, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts do not exceed $29 million. Cash method taxpayers may find it easier to shift income or accelerate expenses.

Qualified Business Income Deduction

Taxpayers other than corporations can deduct up to 20% of their qualified business income. For 2023, if taxable income exceeds $364,200 for a married couple filing jointly or $182,100 for single, married filing separately, and heads of household the deduction may be limited based on:

Whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health or consulting);
The amount of W-2 wages paid by the trade or business; and/or
The unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in applies to joint filers with taxable income between $364,200 and $464,200, and to all other filers with taxable income between $182,100 and $232,100.

Business Property Section 179 Expensing and First Year Bonus Depreciation Deductions

Section 179 Expensing

Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2023, the expensing limit is $1,160,000, and the investment ceiling limit is $2,890,000.

Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software.
It is also available for qualified improvement property, such as:

- Any improvement to a building’s interior (but not for enlargement of a building, elevators or escalators, or the internal structural framework);
- Roofs; and
- HVAC, fire protection, alarm, and security systems.

The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to deduct most, if not all, of their outlays for machinery and equipment. As an additional value consideration, the expensing deduction is not prorated for the time that the asset is in service during the year.

The expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is in service during the year and can be a useful tool for year-end tax planning.
Property acquired and placed in service in the last days of 2023, rather than at the beginning of 2023, can result in a full expensing deduction for 2023.
Please note that there are some additional limits to expensing vehicles that may prevent a full write-off in the year of purchase.

Bonus Depreciation

Businesses can claim an 80% first year bonus depreciation deduction for machinery and equipment bought used (with some exceptions) or new (if purchased and placed in service this year), and for qualified improvement property, described above as related to the expensing deduction.

The 80% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year.
The 80% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2023.

Safe Harbor Election

Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense lower-cost assets and materials and supplies, assuming the costs do not have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules.

To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; i.e., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500.

Maximize Tax Benefits of NOLs

Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers. Businesses should make sure they maximize the tax benefits of their NOLs.

For tax years beginning after 2020, NOL carryovers from tax years beginning after 2017 are limited to 80% of the excess of the corporation’s taxable income over the corporation’s NOL carryovers from tax years beginning before 2018 (which are not subject to this 80% limitation, but may be carried forward only 20 years). If the corporation does not have pre-2018 NOL carryovers, but does have post-2017 NOLs, the corporation’s NOL deduction can only negate up to 80% of the 2023 taxable income with the remaining subject to the 21% federal corporate income tax rate. Corporations should monitor their taxable income and submit appropriate quarterly estimated tax payments to avoid underpayment penalties.
Losses from pass-through entities must meet certain requirements to be deductible at the partner or S corporation owner level.

Defer Tax on Capital Gains

Tax planning for capital gains should consider not only current and future tax rates, but also the potential deferral period, short and long-term cash needs, possible alternative uses of funds and other factors.

Noncorporate shareholders are eligible for exclusion of gain on dispositions of Qualified Small Business Stock. For other sales, businesses should consider potential long-term deferral strategies, including:

Reinvesting capital gains in Qualified Opportunity Zones.
Reinvesting proceeds from sales of real property in other “like-kind” real property.
Selling shares of a privately held company to an Employee Stock Ownership Plan.

Claim Available Tax Credits

Businesses should make sure they are claiming all available tax credits. The U.S. offers a variety of tax credits and other incentives to encourage employment and investment. These tax credits are often in targeted industries or areas such as innovation and technology, renewable energy and low-income or distressed communities. Many states and localities also offer tax incentives.

The Employee Retention Credit (ERC) is a refundable payroll tax credit for qualifying employers that were significantly impacted by COVID-19 in 2020 or 2021. For most employers, the compensation eligible for the credit had to be paid prior to October 1, 2021. However, the deadline for claiming the credit does not expire until the statute of limitations closes on Form 941. Therefore, employers generally have three years to claim the ERC for eligible quarters during 2020 and 2021 by filing an amended Form 941-X for the relevant quarter. Employers that received a Paycheck Protection Program (PPP) loan can claim the ERC but the same wages cannot be used for both programs.

Taxpayers that reinvest capital gains in Qualified Opportunity Zones may be able to temporarily defer the federal tax due on the capital gains. The investment must be made within a certain period after the disposition giving rise to the gain. Post-reinvestment appreciation is exempt from tax if the investment is held for at least 10 years but sold by December 31, 2047.

Other incentives for employers include the Work Opportunity Tax Credit, the Federal Empowerment Zone Credit, the Indian Employment Credit and credits for paid family and medical leave (FMLA).

There are several tax benefits available for investments to promote energy efficiency and sustainability initiatives. The IRA extends and enhances certain green energy credits as well as introduces a variety of new incentives. Projects that have historically been eligible for tax credits and that have been placed in service in 2023 may be eligible for credits at higher amounts.

Considerations for Employers

Employers should consider the following issues as they close out 2023 and enter 2024:

Employers have until the extended due date of their 2023 federal income tax return to retroactively establish a qualified retirement plan and to fund the new or an existing plan for 2023. However, employers cannot retroactively eliminate existing retirement plans (such as simplified employee pensions (SEPs) or SIMPLE plans) to make room for a retroactively adopted plan (such as an employee stock ownership plan (ESOP) or cash balance plan).

Contributions made to a qualified retirement plan by the extended due date of the 2023 federal income tax return may be deductible for 2023. Contributions made after this date are deductible for 2023.

Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2023 is $66,000. The maximum SEP contribution for 2024 is $69,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).

Year-end bonuses can be timed for maximum tax effect by both cash-basis and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Generally, for calendar year accrual basis taxpayers, accrued bonuses must be fixed and determinable by year end and paid within 2.5 months of year end (by March 15, 2024) for the bonus to be deductible in 2023. However, the bonus compensation must be paid before the end of 2023 if it is paid by a Personal Service Corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.

State and Local Taxes

Businesses should monitor the tax laws and policies in the states in which they do business to understand their tax obligations, to identify ways to minimize their state tax liabilities, and to eliminate any state tax exposure. The following are some of the state-specific areas taxpayers should consider when planning for their tax liabilities in 2023 and 2024:

Nexus rules

Has the business reviewed the nexus rules in every state in which it has property, employees or sales to determine whether it has a tax obligation? State nexus rules are complex and vary by state. Even minimal or temporary physical presence within a state can create nexus (i.e., temporary visits by employees for business purposes; presence of independent contractors making sales or performing services, especially warranty repair services; presence of mobile or moveable property; or presence of inventory at a third-party warehouse). In addition, many states have adopted a bright-line factor-presence nexus threshold for income tax purposes (i.e., $500,000 in sales). Also keep in mind that foreign entities that claim federal treaty protection are likely not protected from state income taxes, and those foreign entities that have nexus with a state may still be liable for state taxes.

Has the business considered the state income tax nexus consequences of its mobile or remote workforce, including the impacts on payroll factor and sales factor sourcing? Most states that provided temporary nexus and/or withholding relief relating to teleworking employees lifted those orders during 2021.

These are just some of the year-end tax planning strategies that could potentially benefit you and your business. Please contact us if you have questions, want more information, or would like us to assist with year-end planning.

Corporate Transparency Act

Starting January 1, 2024, a significant number of businesses will be required to comply with the Corporate Transparency Act (“CTA). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company.

It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The intent of the BOI reporting requirement is to help US law enforcement combat money laundering, the financing of terrorism and other illicit activity.

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.

Below is some preliminary information for you to consider as you approach the implementation period for this new reporting requirement. This information is meant to be general-only and should not be applied to your specific facts and circumstances without consultation with legal counsel.

WellsColeman is not providing any service which can be construed as legal advice as part of this engagement. We assume no responsibility for advising you on the legal or regulatory aspects of the Corporate Transparency Act (CTA). In addition, we assume no responsibility for submission of any reports to the Financial Crimes Enforcement Network (FinCen) and client’s beneficial ownership information. It should be noted that management is responsible for complete compliance with the CTA.

What entities are required to comply with the CTA’s BOI reporting requirement?

Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Domestic entities that are not created by the filing of a document with a secretary of state or similar office are not required to report under the CTA.

Foreign companies required to report under the CTA include corporations, LLCs or any similar entity that is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office.

Are there any exemptions from the filing requirements?

There are 23 categories of exemptions. Included in the exemptions list are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities, among others. Please note these are not blanket exemptions and many of these entities are already heavily regulated by the government and thus already disclose their BOI to a government authority.

In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must:

Employ more than 20 people in the U.S.;
Have reported gross revenue (or sales) of over $5M on the prior year’s tax return; and
Be physically present in the U.S.

Who is a beneficial owner?

Any individual who, directly or indirectly, either:

Exercises “substantial control” over a reporting company, or
Owns or controls at least 25 percent of the ownership interests of a reporting company

An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

The detailed CTA regulations define the terms “substantial control” and “ownership interest” further.

When must companies file?

Businesses will not be able to register until January 2024 at the earliest.

There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information.

New entities (created/registered after 12/31/23) must file within 90 days,
Existing entities (created/registered before 1/1/24) must file by 1/1/25.
Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports must file within 30 days.

What sort of information is required to be reported?

Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the beneficial owners of the entity and for newly created entities, the company applicants of the entity is required. This information includes — name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.

Risk of non-compliance

Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time. For more information about the CTA, visit www.aicpa-cima.com/boi.

RetirePath VA

Which Employers Must Register for RetirePath VA? Employers must register by February 15, 2024 if they:

Have been in business for 2 or more years;
Have more than 25 eligible employees; and
Do not already offer a retirement plan

Take the employer eligibility quiz to determine if your Virginia business must register.

How is Eligible Employee Defined? Employees 18 years or older who work at least 30 hours a week are eligible.

What is the Deadline for Registration?

Qualifying businesses must be registered by February 15, 2024.
RetirePath VA will send emails and letters to qualifying businesses that will contain a registration access code and detailed online enrollment instructions. Businesses should expect to receive their access codes in late September.
Contact RetirePath VA if your business meets the above requirements, but has not received an access code.

Penalty: Failure to register by February 15, 2024 will result in a penalty of $200 per employee per year.

Actions to Take Based on Business Size

Businesses with under 25 eligible employees that did not receive a code do not require any further action.
Businesses with under 25 eligible employees that did receive a code must submit an exemption form.
Businesses with over 25 eligible employees that did not receive a code must contact RetirePath VA to secure one, assess business based on qualifications listed above, and either register or submit exemption form.

Advantages for Employers

RetirePath VA provides an after-tax Roth IRA that is fully funded by the employee. No employer matching is required or allowed.
The program integrates seamlessly with many leading payroll providers. Visit the Payroll Providers page for additional resources on the integration process.

What Employees Need to Know

The program automatically enrolls employees at a 5% contribution rate with an annual $27 administrative fee.
Every January 1st, the contribution rate increases by 1%, capping at 10% of the employee’s total pay.
Only employees can opt out of RetirePath VA. Employers are not allowed to opt-out on the employee’s behalf.
Employees can opt-out of automatic enrollment and contribution escalation at any time by phone, online, or mailing a completed opt-out form

Educational materials and how-to-guides are available on the Program Resources page and employees receive program information once enrolled.

Sincerely,

5004 Monument Ave

Richmond, VA 23230

T: 804.249.3328

www.wellscoleman.com

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2023 Business Planning Guide

BDO Alliance