As we get into the final month of 2022, owners and executives of privately held businesses, regardless of the industry, will have a to-do list that looks very similar:
- Plan the holiday gift list
- Start sending holiday cards
- Begin the year-end tax planning process
The tax landscape has been one of constant change over the past five years, and 2022 is no different, and at the start of 2023, multiple provisions from recent tax legislation will be changing or expiring. So while our professionals may not be able to help with holiday dinners or cards, the following are some of the more important changes that could create great opportunities for tax planning and financial savings.
Bonus Depreciation Phase Out Begins
One of the most popular benefits of the Tax Cuts and Jobs Act was being able to fully expense certain assets in the year it was purchased via 100% accelerated bonus depreciation. Unfortunately, starting January 1, 2023, bonus depreciation will begin to sunset:
- Placed in service by December 31, 2022 – 100% bonus depreciation
- Placed in service by December 31, 2023 – 80% bonus depreciation
- Placed in service by December 31, 2024 – 60% bonus depreciation
- Placed in service by December 31, 2025 – 40% bonus depreciation
- Placed in service by December 31, 2026 – 20% bonus depreciation
However, there is still time to sneak in any major fixed asset purchases and enjoy 100% bonus depreciation. Talk with your team about the feasibility of moving a purchase that had been planned for Q1 2023, into Q4 2022 to maximize the full depreciation benefit for Federal purposes.
Under the Consolidated Appropriations Act of 2020, taxpayers have been able to deduct 100% of the cost of meals in 2021 and 2022, as long as they were purchased from a restaurant with a business purpose. This legislation was meant to reward businesses for supporting the struggling restaurant industry, hurt by the pandemic.
But starting January 1, 2023, the deduction of a business-related meal will revert to the standard 50% limitation. Like the planning point above, check your calendar for any potential business meals scheduled for early 2023. If able, move them into the current calendar year and enjoy a larger deduction.
Interest Deduction Limitation
The Section 163(j) business interest limitation was enacted for tax years beginning in 2018 as a part of the Tax Cuts and Jobs Act. The law imposes a possible 30% limitation on the deductibility of business interest expense. Beginning in 2022, the formula for the limitation has become less taxpayer friendly. When the law passed, adjusted taxable income (ATI) started with taxable income, and then included add-back adjustments for interest expense, depreciation, amortization, and depletion, to name just a few. As a result, taxpayers with large amounts of depreciation, amortization, and depletion were able to have a higher ATI and deduct more interest expense, or avoid limitation altogether.
However, beginning January 1, 2022, the ATI formula no longer includes add-back adjustments for depreciation, amortization and depletion. This means that many taxpayers, who have never had to limit their interest deduction, may see an interest expense limitation when they file their 2022 taxes.
That said, planning for this change is difficult and may include more factors than just shifting expenses. Talk to your accounting team to determine if increasing the ATI makes sense for your business, or whether tax planning in certain industries can avoid a limitation altogether.
Want to learn what other tax provisions are changing in 2023? Check out this tax planning one-sheet from Ellin & Tucker’s Mike Berry on other notable tax law changes and start the year off on sound financial footing. As always, please contact Ellin & Tucker with any questions.