People are already putting up Christmas decorations. Evidently they didn't know that if you do that before Thanksgiving, Santa kills an elf. But you know what that means? Of course you do, its time for Year End Tax Planning!

Here are some ideas to go over with your tax professional for guidance to lower your 2023 federal income tax return. For the following discussions, we're assuming that you're not taking the standard deduction for federal income tax purposes.

Use Retirement Plans

It is not too late to use retirement plans to lower your 2023 tax bill. Here's how to do it.

Create your retirement plan for 2023.

Do you currently have a retirement plan established for yourself or your company?

If you are able to, consider setting up a retirement plan and contribute cash towards it in order to receive a tax deduction for the year 2023.

In most defined contribution plans, such 401(k) plans, the owner-employee functions both in the capacity of an employee and an employer, regardless of whether they operate a corporation or a sole proprietorship. This enables them to make contributions in both roles, thereby allowing for significant savings.

You may qualify for the New Plan Start-Up Tax Credit up to $15,000

By establishing a new qualified retirement plan, such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan, a SIMPLE IRA plan, or a SEP, individuals can qualify for a non-refundable tax credit that is the greater of:

$500 or
the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.

Your income tax credit is determined by your "qualified start-up costs," which refers to the necessary expenses you pay or incur in connection with the retirement start-up credit. Things like:

the establishment or administration of the plan, and
the retirement-related education of employees for such plan.

You can claim the New 2023 Small Employer Pension Contribution Tax Credit for up to $3,500 per employee

The SECURE 2.0, passed in 2022, included an added credit for employer retirement plan contributions made on behalf of employees. The new tax credit, which can reach up to $1,000 per employee, starts on the plan start date. The new credit is effective for 2023 and later.

The new $1,000 credit does not apply to employer contributions to a defined benefit plan or pre-tax contributions under Section 402(g)(3).

In the first year of the plan, there is a credit available for up to 100 percent of the employer contribution, with a maximum of $1,000 per employee. In subsequent years, the credit remains at $1,000 per employee, but the credit is limited to:

100% in year 2
75%in year 3
50% in year 4
25% in year 5
0% in year 6 and beyond

Example: This year, a retirement plan was established and $1,000 was contributed to each of the 30 employees' retirement, resulting in a tax credit of $30,000.

Additionally, employees with wages exceeding $100,000 in 2023 will not receive any credit. In the coming years, the $100,000 threshold will be adjusted to account for inflation.

You may be eligible to receive a $500 tax credit for each of three years, resulting in a total of $1,500

The initial SECURE Act introduced a non-refundable credit of $500 per year for a maximum of three years. This credit begins with the first taxable year (2020 or later) in which an eligible small employer includes an automatic contribution arrangement in a 401(k) or SIMPLE plan.

The new $500 auto-contribution tax credit is an additional benefit to the start-up credit and can be applied to both new and existing retirement plans. It is worth mentioning that the credit can be triggered without any financial expenditure, as it only requires the addition of the auto-enrollment feature, which does include a provision for employees to opt out.

Qualified Business Income Deduction (Section 199a)

It is important to take into account your Section 199A deduction when planning your year-end taxes. Failure to do so could result in a deduction amount of $0, which may not be desirable.

Here are three potential year-end strategies that, under the appropriate circumstances, could both lower your income taxes and increase your Section 199A deduction.

Capture Capital Losses

Capital gains are included in your taxable income. Taxable income:

determines your eligibility for the Section 199A tax deduction,
sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
establishes when you need wages and/or property to obtain your maximum deductions.

If the capital gains are impacting your Section 199A deduction, you still have time until the end of the year to utilize capital losses to counterbalance those detrimental gains.

Make Charitable Contributions

The Section 199A deduction utilizes your Form 1040 taxable income to determine its thresholds. By utilizing itemized deductions, you can potentially decrease or eliminate threshold issues and enhance your Section 199A deduction.

Charitable donations can be a simple method to increase your itemized deductions before the year ends, if you already itemize. A deduction for contributions can be cash contributions, but non-cash items are also deductible contributions.

Purchase Business Assets.

Section 179 expensing allows for the full write-off of most property and equipment, while bonus and MACRS depreciation can be used to write off over 80 percent. To qualify, assets must be purchased and put into service by December 31, 2023.

The big asset purchases and write-offs can help your Section 199A deduction in two ways:

When your taxable income is below the threshold, they can help decrease your taxable income and increase your Section 199A deduction.
Asset purchases have the potential to increase your Section 199A deduction if your current deduction calculation includes the 2.5 percent of unadjusted basis in your business's qualified property. This increase in qualified property can lead to an increase in your Section 199A deduction.

Tried and True (Everything Else)

Here are six business tax deduction strategies that can be easily understood and implemented before the end of 2023. Be sure to know what tax bracket you are in and your marginal tax rate as well as your filing status, and keep strive to keep your taxable income below applicable limits.

Use the IRS Safe Harbor for Prepaying Expenses

The IRS regulations include a safe-harbor rule which permits cash-basis taxpayers to deduct qualifying expenses up to 12 months in advance without any challenge, adjustment, or change by the IRS.

According to the safe harbor rule, prepayments made in 2023 cannot be carried over to 2024. This aligns with the guideline that only 12 months of qualifying expenses can be prepaid.

Qualifying expenses for a cash-basis taxpayer include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Stop Invoicing

One effective strategy to lower your taxable income for the current year is to delay billing your customers, clients, and patients until after December 31, 2023. This assumes that you or your corporation operates on a cash basis and follows the calendar year.

Buy Equipment

The increased limits on Section 179 expensing allow for 100 percent write-offs on most equipment and machinery, while bonus depreciation allows for 80 percent write-offs. If you purchase your equipment or machinery and put it into service before December 31, you can receive a significant write-off this year.

Qualifying Section 179 and bonus depreciation purchases encompass both new and used personal property, such as machinery, equipment, computers, desks, chairs, and other furniture, along with certain qualifying vehicles.

To meet the "placed in service" requirement, it is necessary to drive the vehicle for at least one business mile on or before December 31, 2023. This means that ownership and usage of the vehicle are both essential in order to qualify for significant deductions.

Buy a New or Used Vehicle in Excess of 6,000 Pounds

If a new or used SUV or crossover vehicle with a manufacturer classification as a truck and a GVWR of 6,001 pounds or more is bought and placed in service on or before December 31, 2023, you can lower your taxes four ways:

Bonus depreciation of 80%
Section 179 expensing up to $28,900
MACRS depreciation using the five-year table
There are no restrictions on vehicle depreciation deductions for luxury vehicles.

The truck must pass two tests: the more-than 6000-pound GVWR test and the bed-length test. If it fails the bed-length test but passes the GVWR test it is classified as an SUV. This classification is not a negative thing. The vehicle can still be eligible for expensing up to the $28.900 SUV expensing limit and 80 percent bonus depreciation.

Buy an Electric Vehicle

If an individual purchases an all-electric vehicle, they may be eligible for a tax credit of up to $7,500. The credit is applied before following the regulations specific to the purchased vehicle.

Use Your Credit Cards

Shhh, don’t tell Dave Ramsey! For single-member LLCs or sole proprietors filing Schedule C, the date of purchase charged to a credit card is the date when the expense becomes deductible. Use your credit cards for last-minute acquisitions of office supplies and other essential business items.

The same rule applies for corporations with a corporate credit card. If operate in a separate legal entity and use your personal credit card for expenses, you can still deduct them. Prepare an expense report and submit to your business before the end of the year.

Don’t Assume You Are Taking Too Many Deductions

If the amount of your business deductions is greater than your business income, you will have a tax loss for the year. This is referred to as a "net operating loss" or NOL according to tax law, with some adjustments made to the loss.

When starting a business, it is possible to have a net operating loss (NOL) in the first year, or even in subsequent years, despite the business being successful.

Under the Tax Cuts and Jobs Act (TCJA), the provision allowing individuals to carry back their NOL for immediate tax refunds from prior years has been eliminated. Currently, individuals can only carry their NOL forward and it can only offset up to 80 percent of their taxable income in any one future year.

Don't Forget Qualified Improvement Property (QIP)

Qualified Improvement Property (QIP) refers to any enhancements made by the owner to the interior of a non-residential real property, such as office buildings, retail stores, and shopping centers, after the building was initially put into service.

One significant aspect of QIP is that it is not classified as real property subject to 39-year depreciation. QIP is instead considered 15-year property and is eligible for:

You can use Section 179 expensing, and
80 percent bonus and MACRS depreciation.

Pay Your State Taxes Through Your Business

Many states allow an election for pass-through entities to receive a tax deduction for income tax payments made on the behalf of the owners or partners. This keeps the individual owner from running into a reduction of their itemized deduction from the State and Local Tax (SALT) limit of $10,000. Don't use income tax withholding to pay your state taxes, pass the SALT! For more information on how to do this, read this article.

Conclusion

In conclusion, implementing these year-end 2023 tax tips can make a huge difference when it comes to lowering your small business taxes. By staying organized, maximizing deductions, and consulting with a tax professional, you can minimize your tax burden and keep more money in your pocket. Start planning now and set your small business up for financial success in the year ahead. Cheers to a prosperous and tax-efficient new year!

Year End 2023 Tax Tips To Lower Your Small Business Taxes