Depreciation-Based Deductions

As the year draws to a close, a business may benefit from one or more of three depreciation-based tax breaks: (1) the Section 179 deduction; (2) first-year “bonus” depreciation; and (3) regular depreciation.

YEAR-END MOVE: Place qualified property in service before the end of the year. If your business does not start using the property before 2024, it is not eligible for these tax breaks.

Section 179 deduction: Under Section 179 of the tax code, a business may currently deduct the cost of qualified property placed in service during the year. The maximum annual deduction for 2023 is $1.16 million provided your total purchases of property do not exceed $2.89 million..

Be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This rule could limit your deduction for 2023.

First-year bonus depreciation: The first-year bonus depreciation applicable percentage for 2023 is 80% and is scheduled to drop to 60% in 2024.

Qualified Retirement Plans

 The new SECURE 2.0 law includes a number of provisions affecting employers with qualified retirement plans.

 YEAR-END MOVE: Position your business to maximize available tax benefits and avoid potential problems. Consider the following key changes of particular interest.

For 401(k) plans adopted after 2024, an employer must provide automatic enrollment to employees. Certain small companies and start-ups are exempt.

• Beginning in 2023, employers with 50 or fewer employees can qualify for a credit equal to 100% of their contributions to a new retirement plan, up to $1,000 per employee, phased out over five years. The 100% credit is reduced for a business with 51 to 100 employees. This tax break is in addition to an enhanced credit for plan start-up costs.
• Beginning in 2024, employers may automatically provide employees with emergency access to accounts of up to 3% of their salary, capped at $2,500.
• An employer may elect to make matching contributions to an employee’s retirement plan account based on student loan obligations, beginning in 2024.
• The new law shortens the eligibility requirement for part-time workers from three years to two years, beginning in 2023, among other modifications.
• Any catch-up contributions to 401(k) plans must be made to Roth-type accounts for employees earning more than $145,000 a year (indexed for inflation).

Tip: This last provision was initially scheduled to take effect in 2024, but a new IRS ruling just delayed it for two years to 2026.

Employee Bonuses

Generally, employee bonuses are deductible in the year that they are paid. For instance, you must dole out bonuses before January 1, 2024, to deduct those bonuses on your company’s 2023 return. However, there’s a special rule for accrual-basis companies. In this case, the bonuses are currently deductible if they are paid within 2½ months of the close of the tax year.

YEAR-END MOVE: If your company qualifies, determine bonus amounts before year-end. As a result, the bonuses can be deducted on the company’s 2023 return as long as they are paid by March 15, 2024. Keep detailed corporate minutes to support the deductions.

This special deduction rule does not apply to bonuses paid to majority shareholders of a C corporation or certain owners of an S corporation or a personal service corporation.

Tip: Note that the bonuses are taxable to employees in the year in which they receive them—2024. Thus, the employees benefit from tax deferral for a year even if the company claims a current deduction.

Miscellaneous

• Stock the shelves with routine supplies (especially if they are in high demand). If you buy the supplies in 2023, they are deductible this year even if they are not used until 2024.
• Maximize the qualified business interest (QBI) deduction for pass-through entities and self-employed individuals. Note that special rules apply if you are in a “specified service trade or business” (SSTB). See your professional tax advisor for more details.  
• If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $28,900. The luxury car limits do not apply to certain heavy-duty vehicles.