It’s fair to say a lot has changed in the past twelve months––especially from a tax perspective. The end of a year offers an opportunity for reflection, and as we enter the last few weeks of 2022, we encourage you to consider the opportunities that might lie ahead for you and your business in 2023 and beyond.
2022 has seen significant changes to tax legislation. Many of the pandemic-era deductions and credits that applied in 2021 have been phased out, but at the same time, new opportunities have arisen as a result of new legislation at a federal, state, and local level.
These changes come amid unparalleled economic times. Earlier this year, inflation reached its highest rate since the early 1980s, and interest rates continue to increase at a fast pace. Some businesses are finding their way just fine, but others are struggling, often due to issues outside their control.
It’s our goal to help you make sense of these changes, minimize your downside, and identify new opportunities for you and your business to operate in a more tax-efficient manner. That’s why we’ve pulled together a summary of all the major tax news and updates you need to be aware of as we head into 2023.
Curious about how these changes might apply to you and your business? Contact an advisor to learn more about how LBMC can support your tax planning needs.
Tax Opportunities in 2023
The past year has seen significant changes to the tax code. While the Biden Administration has not passed as many tax changes as was initially proposed, a lot of changes have been signed into law. Capital gains and individual tax rates remain unchanged, but a lot of smaller adjustments have passed in the past year: at a federal, state, and local level.
As a business owner, it’s important you have a trusted tax advisor who can help you make sense of the opportunities available to you. Here is a summary of five major tax opportunities to bear in mind as we enter 2023.
R&D Investment Credits
Recent years have seen R&D Investment Credits become much more accessible to a wider range of businesses. If you’ve expanded your business in a meaningful way in the last twelve months, or intend to start an expansion next year, it’s worth investigating R&D Investment Credits.
These tax credits are available to businesses that invest in qualified research and development activities and aim to create incentives for companies to invest in innovation. Eligibility is fairly broad: if your company allocates resources towards developing new processes, products, or software, you might qualify for these credits.
Eligibility even extends to newer companies that may lack the income taxes to offset the credit. In these instances, Section 41(h) allows small businesses to apply the credit toward payroll taxes. From 2023 onwards, businesses can deduct $500,000 under this program: up from $250,000 in 2022.
Bonus Depreciation Phase Out
2023 will see bonus depreciation, a key component of the Tax Cuts and Jobs Act, begin to phase out. After being set at 100% for the past few years, 2023 will see bonus depreciation drop to 80%, with further 20% reductions in subsequent years.
If your business needs to make a large purchase, such as new machinery, equipment, or even large work vehicles, consider pulling that purchase forward and placing the asset in service before the end of 2022. Doing so will enable you to take 100% bonus depreciation, rather than 80% for assets placed in service in 2023.
Retirement Plans for Small Businesses
If you operate a small business, there are many tax advantages to be had from taking a proactive approach toward retirement planning. That’s true both for business owners themselves, who may be able to defer their profits into retirement, as well as businesses looking to add retirement plans for their employees.
Credits are available for businesses starting a 401(k) plan for their employees. These programs must be implemented before the tax filing extension deadline next fall, and tax credits are available for up to $5,000.
Energy Efficiency Credits
The passage of the Inflation Reduction Act ushered in a range of new energy efficiency credits that are available both to businesses and individuals. They include:
- Section 179D Energy-Efficient Construction: expands eligibility for energy-efficient construction tax credits to nonprofit organizations and enables nonprofit organizations to transfer these tax credits to qualified construction partners.
- Residential Clean Energy Credit: if you’re planning on any home improvement projects next year, you might qualify for significant tax credits. These apply to major projects like the addition of solar panels but are also available to homeowners making smaller changes, such as installing energy-efficient windows, doors, and skylights.
- Clean Vehicle Credit: if you’re considering purchasing a new vehicle, credits are available for those who buy “clean” vehicles, including fully electric and plug-in hybrid vehicles. Tax credits can be worth as much as $7,500 and vary depending on the vehicle you purchase and your taxable income.
State and Local Changes
Of course, changes to tax legislation don’t just happen at a federal level: state and local governments have made changes in 2022 also.
In Kentucky, where we and many of our clients are based, H.B. 8 specified 35 new business categories that are subject to Sales and Use Tax. One example: if you run a photography business, you previously did not have to collect these taxes or file sales tax returns, but now, you do. The good news? Over the next few years, this legislation is expected to lower Kentucky’s individual income tax rate.
At a local level, municipalities including the Louisville Metropolitan Government are also introducing tax changes in 2023. Property tax rates are set to decrease for some homeowners and increase for others, and other changes to nexus rules mean that some businesses might not be subject to new Occupational License Taxes.
If you’re considering an expansion next year, our team has the knowledge to evaluate the tax credits available on a federal, state, and local level, helping you grow your business Whether it’s starting construction on a new site or opening a new office, there are often significant tax incentives available for growing, entrepreneurial businesses.
LBMC: Your Trusted Advisor
Throughout all these changes, it’s important to maintain an ongoing relationship with your tax advisor. At LBMC, it’s our mission to help our clients identify and take advantage of every tax opportunity available to them.
Taking a proactive approach toward your business and personal tax strategy is key to this. And while it’s not too late to retroactively claim existing tax credits such as Employee Retention Credits, adopting a forward-looking approach can help you and your business save money today. In every conversation we have with clients, our advisors are listening for opportunities to save you money.
As the year draws to a close, we’re grateful for all our clients and are excited to continue partnering with fast-growing Tennessee, Kentucky and Indiana businesses in 2023 and beyond. To learn more about working with LBMC, contact us today.