The Year of Early Planning
While tax reform hasn’t been able to get pushed through in Washington, that doesn’t mean everything is status quo. There is actually much to consider this year, and you should consider it now instead of in October or November. Several items to consider early this year are laid out below.
Bonus Depreciation
For years companies have been utilizing bonus depreciation to quickly write off assets that would otherwise normally get depreciated over several years. Bonus depreciation has been set at 100% for assets placed in service after September 27, 2017 but starting January 1, 2023 bonus will start to be phased out 20% each year until full phase out beginning January 1, 2027. For example, in 2023 you can write off 80% of an eligible asset and then depreciate the remainder over the assets useful life, or use Section 179 to expense the rest, again, if eligible. For large companies that normally phase out of Section 179 and have been utilizing bonus depreciation, this could create the possibility for a large increase in taxable income. Consider this scheduled phase out when planning your current and future year capital expenditures.
Business Interest Expense Limitation
The business interest expense limitation came into play with the Tax Cuts and Jobs Act. Essentially it limited the deduction of business interest expense to 30% of adjusted taxable income if you are not a small business exempt from the rule. Business interest expense not allowed carries forward to determine if it is allowed in a future year. Depreciation, amortization and depletion has been allowed as an addback in determining adjusted taxable income for tax years beginning before 2022. This increases the adjusted taxable income and thus decreases the likelihood that a company will hit that 30% mark with their business interest expense. For tax years beginning in 2022, depreciation, amortization and depletion will no longer be an addback. Without this adjustment more companies will not be able to immediately deduct all their business interest expense. Consider this when determining if you want to finance capital expenditures and when you are projecting taxable income.
State Pass-through Entity Elections
At this time a little less than half of all states in the U.S. have passed some sort of pass-through entity election to pay state tax at the entity level. The benefit being that the state taxes can then be fully deducted on the entity’s Federal tax return. Many individuals receive a very limited, if any, benefit for their state income taxes paid at the individual level due to the $10,000 state and local tax deduction limit for itemized deductions. With the standard deduction being as high as it is, many individuals aren’t itemizing anyway and in that case the state income taxes are providing zero benefit. We encourage all clients that can potentially make these elections to review their tax situation. Be aware of if the election would provide a benefit, how to make the election and if estimated tax payments are necessary.
Per Diem
Meals provided by restaurants continue to be allowed to be fully deducted if paid or incurred before January 1, 2023. The special transportation per diem, as previously discussed in this industry blog, is included in this temporary deduction relief. When thinking about the potential benefit, consider state conformity. For example, Wisconsin does not conform to this change made with the Consolidated Appropriations Act, 2021 and therefore all business meals are still limited to a 50% deduction and the special transportation per diem subject to a 80% deduction.
Potential Future Tax Reform
While nothing has passed for immediate tax reform due to being unable to get the required votes, reform is still a topic of conversation while other priorities take center stage. Recently a “billionaire tax” was proposed by President Biden. The agenda is clearly to increase taxes, primarily on those over certain income or net worth levels. It remains to be seen what, if anything, can change but it’s important to plan for those changes and be prepared if something does change that could impact your income and cash flow. Budgeting and forecasting is an important step in the planning process and potential changes can be built into models to see how financials could be impacted.
Lease Accounting
New lease accounting standards for financial statements issued in accordance with GAAP (Generally Accepted Accounting Principles) are in effect for fiscal years beginning after December 15, 2021. Many companies will be implementing this standard for the first time this year and most leases will be reported on the balance sheet going forward whereas in the past many leases were just an expense on the income statement. Don’t underestimate the time and resources it will take to implement this accounting standard.
As you can see, early planning and discussions are necessary to get ahead of the curve for this year and beyond. Significant operational business decisions will play large roles in both tax and financial accounting. CLA is here to help.
Nathan is a CPA and has more than ten years of experience providing tax planning, consulting and compliance services to a number of privately held businesses and individuals in a variety of industries, with a special focus on the transportation and logistics industry. He actively communicates with clients and seeks ways to align their individual and business goals with available tax strategies to allow them to make well-informed decisions.
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