Tax Planning Considerations for 2023 (Part 2)

Dominic Rovano

While many businesses put plans in place for major projects and initiatives for the year ahead, one important area that might not be top of mind is your taxes. As the tax season approaches, we’ve compiled a list of tax updates and reminders for 2023 that may affect your business. The information below includes highlights that can help inform your tax strategy for the year ahead. (The first part of this column addresses preliminary tax deadlines and other updates for 2023.)

Reporting requirements

Payroll reporting requirements. Each state has its own annual reporting process. New York State, for example, proceeds as follows: Employers must complete Part C of the NYS-45 (Employee Wage and Withholding Information), along with columns D and E for each quarter. Penalties will be charged quarterly for those that don’t comply.

Foreign reporting. FBARs (Foreign Bank and Financial Accounts, Form 114) are required for those that have a financial interest in, and/or signing authority of, a foreign financial account that exceeds an aggregate value of $10,000 at any time during the year. Failure to file can result in significant penalties, beginning at a minimum of $10,000. FBARs are due on or before April 17, 2023. Automatic extensions are granted for six months, extending the filing due date to October 16, 2023. For first-time filers that fail to file the required FBARs, there’s a waiver to abate the late filing penalties. If you’d like to review the requirements for FBARs, visit the IRS website.

Other recent changes

Personal and business use of automobiles. Employers are required to report and provide information on their tax returns for vehicles provided to their employees for business and personal use. This information is used to report employee taxable fringe benefits on the employee’s Form W-2. The IRS requires that the personal use of the vehicle must be included in the employee’s compensation if the employee doesn’t reimburse the employer for vehicle usage. Employers must have policies and procedures in place for those vehicles used solely for business prohibiting personal use other than commutation from their residence to the company. The company must compute the daily personal usage of commutation to be included in the employee’s Form W-2.

Methods for calculating employer-provided vehicles include:

Lease rule value. This rule applies to leased vehicles.
Cents-per-mile rule (limitations apply). To qualify for this rule, vehicles must be driven more than 10,000 miles per year and must be valued at less than $56,100. As of July 1, 2022, the business use standard mileage rate has increased from 58.5 to 62.5 cents per mile.
Commuting rule (limitations apply). To qualify for this rule, the company must have a written policy in place indicating that the vehicle is used solely for business use. This method cannot be used for one percent or more owners, directors and officers with compensation of $120,000 or more or an individual with compensation of $245,000 or more.
General valuation rule. This rule considers the cost an individual would incur to lease the vehicle under the same terms in the same geographic area based on the vehicle’s market value and annual lease value. This applies to vehicles valued up to $59,999. Annual lease value tables are provided by the IRS for reference. For vehicles with a market value of more than $59,999, the annual lease value is 25 percent of the vehicle’s fair market value plus $500.

CARES Act and Tax Cuts and Jobs Act highlights

Moving expenses. Any reimbursements for moving expenses should be included in an employee’s wages and are subject to Federal income tax. Employers may deduct the qualified moving expenses only if they are included in an employee’s wages.

Qualified business income. You may be eligible for a deduction of up to 20 percent of qualified business income. Consult your tax advisor to determine if you’re eligible.

Meals. Meals provided by the employer had increased from 50 percent to 100 percent deductible for meals purchased from a restaurant for the 2021 and 2022 tax years. While entertainment is typically not deductible, there are some exceptions for 100 percent deductibility. For the 2023 tax year, the deductibility of meals will revert back to 50 percent deductibility. Please consult your tax advisor for more information.

Net operating losses. Under the CARES Act, taxpayers can carry back 2018, 2019 and 2020 net operating losses five years. Any unused losses can be carried forward 20 years. For 2021 and 2022, NOLs are required to be carried forward and not allowed to be carried back. Consult your tax advisor for State NOL rules.

Change in accounting methods. Small businesses (taxpayers with average gross receipts in 2022 of $27 million or less over the prior three years) may use the cash basis method of accounting.

Suspension of excess business loss. For 2018 through 2020, business losses are fully deductible. For 2021 through 2029, any business losses in excess of the limitations below are not deducted until the subsequent year. Please consult your tax advisor for state implications as many states treat such losses differently from federal tax law. Business loss limitations for 2023 are as follows:

Taxpayers married filing jointly: Business losses in excess of $578,000.
Taxpayers single and married filing separately: Business losses in excess of $289,000.

Annual gift exclusion. Any transfer from a donor to an individual, either directly or indirectly where money isn’t received in return, is considered a gift. Gifts to your spouse, gifts to a political organization and tuition and medical expenses paid for someone else aren’t considered gifts. Annual gift exclusion amounts for 2023 are as follows:

Annual gift exclusion amount: $17,000 per donor.
Annual lifetime gift exclusion amount: $12.9 million per donor.

Cryptocurrency. The use of virtual currency, such as Bitcoin, could result in a taxable event. With the increasing popularity of cryptocurrency being used, the IRS is increasing its oversight and regulations on cryptocurrency transactions. Consult your tax advisor if you have these transactions.

Depreciation rules

Bonus depreciation. For qualifying assets placed in service by December 31, 2022, 100 percent bonus depreciation deduction is allowed. Bonus depreciation will begin to phaseout for tax years beginning January 1, 2023 through December 31, 2027 as follows:

Allowable Bonus Depreciation Deduction: 2023: 80 percent; 2024: 60 percent; 2025: 40 percent; 2026: 20 percent; 2027: 0.

Consult your tax advisor regarding the benefits of performing a cost segregation study to categorize components of buildings into asset classes that qualify for bonus depreciation.

Section 179. Allows taxpayers to immediately expense the cost of certain tangible property that is eligible for the section 179 deduction. The maximum section 179 deduction that can be deducted increased from $500,000 to $1,000,000 for the 2022 tax year. Section 179 phase-out has increased from $2,000,000 to $2,500,000. Section 179 property includes:

Machinery and equipment purchased for use in a trade or business.
Qualified improvement property.
Roofs, HVAC, fire protection systems, alarm systems and security systems.

Consult your tax advisor for the deductibility of fixed assets purchased during the year as well as federal versus state depreciation rules. There are states that don’t conform to federal depreciation rules.

Credits

Electric vehicles and solar energy. Electric Vehicles: For new 2022 and 2023 electric vehicle models purchased after August 16, 2022 and assembled in North America, a nonrefundable tax credit may be available to be claimed for qualifying electric vehicles up to $7,500. For used electric vehicles purchased, the tax credit will be calculated at the lesser of 30 percent of the vehicle’s value or $4,000.

For new vehicles purchased on or after January 1, 2023, the income limits below apply:

Married filing jointly or surviving spouse: Must not exceed $300,00.
Head of household: Must not exceed $225,000.
Single: Must not exceed $50,000.

Research and development. A federal tax credit is available for costs related to companies performing activities related to the development, design or improvement of products, processes, formulas or software.

This list, while not comprehensive, highlights some of the major tax changes for 2023 and can help position your business for success in the new year. For a more detailed tax strategy, plan with your tax advisor. If you have questions about the topics above, contact a member of the Janover team today.

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Dominic Rovano, CPA, is a partner at Janover LLC and leads the firm’s Professional Services Group.