Even if markets and interest rates are constantly changing as another year draws to a close, one thing is certain. Lowering your company’s tax burden can boost cash flow and profitability. Here are five techniques you can implement before the end of the year to cut your company tax bill. Some of these are time-tested, and some are particularly relevant.

1. Take advantage of the pass-through entity (PTE) tax deduction

State and local tax (SALT) deductions from federal income tax were limited to $10,000 under the Tax Cuts and Jobs Act (TCJA). In response, PTE owners who pay individual income tax on their portion of their business’s profits have relief thanks to the enactment of various “workarounds” by more than 30 states.

While state-by-state variations exist, PTE tax deductions generally provide partnerships, limited liability companies, and S corporations to deduct an entity-level state tax on business revenue, either mandatory or optional, in exchange for an owner-level benefit. The benefit usually applies to each owner’s state income tax as a whole or as a partial tax credit, deduction, or exclusion. Since businesses are exempt from the SALT limit, they can deduct all their tax payments under IRC Section 164 business expenses.

2. Establish a cash balance retirement plan

Retirement plans with cash balances are becoming increasingly common in companies where high-earners frequently max out their 401(k) accounts. The plans combine the more significant maximum benefits and deduction limits of defined benefit plans with the higher contribution limits of defined contribution plans. Compared to 401(k) contributions, cash balance contributions allow a corporation to deduct substantially higher amounts.

For instance, in 2023, a 55-year-old’s maximum employer/employee 401(k) contribution is $73,500, which includes a $7,500 catch-up contribution. Meanwhile, in addition to the 401(k) plan contribution, a firm may contribute an additional $265,000 to a cash balance plan, contingent upon the participant’s age. Age-based contribution caps give individuals close to retirement a great chance to enhance their retirement savings and give the business a sizable deduction.

As per the original SECURE Act, businesses have until their federal filing date (including extensions) to implement a cash balance plan. However, it can take some time to prepare the required paperwork, figure out contributions, and take care of other administrative duties, so it’s best to get started as soon as possible.

3. Implement asset acquisition strategies

Purchasing assets at the right time of year to put them “in service” before year-end has long been a workable strategy for tax reduction. But now there’s a ticking clock to take into account. This is because, barring legislative action, the TCJA eliminates 100% first-year bonus depreciation in 2027 and cuts it by 20% in each subsequent tax year. As of 2023, the deduction has already decreased to 80%.

Eligible assets for first-year bonus depreciation include:

• Computers
• Software
• Automobiles
• Machinery
• Equipment
• Office furniture
• Qualified improvement property, such as roofs, HVAC systems, fire prevention and alarm systems, and security systems (typically, specific improvements to nonresidential property)

Generally speaking, however, it’s best to apply the IRC Section 179 expensing election to asset acquisitions first. You can write off 100% of the acquisition price of both new and old qualifying assets under Section 179. Certain business cars, software, office and computer equipment, machinery, and qualified improvement property are all considered eligible assets.

For 2023, the highest possible Sec. 179 “deduction” is $1.16 million. The program starts to phase out on a dollar-for-dollar basis when a business purchases more than $2.89 million of qualified real estate. The amount of your business activity income is the maximum deduction you can take. Any unused portion can be carried forward indefinitely or claimed as bonus depreciation with no phaseouts or limits. (Note: Besides possible tax savings, consider the impact of high-interest rates when financing asset acquisitions.)

4. Make the most of the deduction for qualified business income (QBI)

Depreciation deductions can lower PTE owners’ QBI deductions. Thus, it’s essential to be cautious. Unless Congress takes action, the QBI deduction will disappear after 2025. PTE income may be subject to rates as high as 39.6% if existing rates expire, along with the QBI deduction if it passes.

However, PTE owners can now deduct up to 20% of their QBI, subject to restrictions based on taxable income, the unadjusted basis of qualifying property, and W-2 earnings received. In addition to several other tax advantages based on taxable income, accelerated depreciation lowers your QBI and, consequently, your deduction.

However, you can increase the deduction if you buy eligible property or raise your W-2 salary. Additionally, by timing your income and deductions, you can avoid the QBI deduction’s income limits (see below).

5. When to expect income and outlays

It’s doubtful that the tax code will undergo significant changes in 2024, given the impending election in November of that year. Therefore, if you adopt cash-basis accounting, pursuing the age-old strategy of timing income and spending is worthwhile.

For instance, you can defer income to 2024 and accelerate expenses to 2023 if you don’t anticipate being in a higher tax bracket the following year. However, as was previously said, you might receive a lower QBI deduction.

Cut your company tax bill

Under some tax laws, seemingly insignificant tax decisions could have expensive, unexpected repercussions. Contact our RRBB advisors for more information or if you have questions. We can assist your company in making the best year-end tax preparation decisions to cut your tax bill.

© 2023