Tax Planning

1. Tax treatment on R&D expenses – As per the new guidelines, R&D expenses are required to be amortized rather than expensed.

   For Domestic based research – 5-year period

   Foreign based research (non-US based)  – 15-year period

2. Limitation on business interest expenses – As per the 2017 Tax Cuts and Jobs Act – the interest expense was limited to 30% of a modified EBITDA calculation.

   As per the CARES Act – the interest expense has moved from 30% to 50%

   Again in 2022 the limitation got reverted to 30% and the depreciation, amortization and depletion are no longer added back in performing the modified EBITDA calculation.

3. Qualified Business Income Deduction (QBID) – Review the 20% qualified income deduction (QBI) calculation and components for non-C-Corporation tax payers for eligibility.
4. Phaseout of 100% bonus depreciation – Starting in 2023, the current 100% bonus depreciation expiring of certain fixed assets used in a trade or business will decrease to 80%. It is set to reduce by 20% each year till it phased out in 2027. Large fixed asset purchases will require careful planning.

   Businesses can claim an 80% federal bonus depreciation expense for 2023 on certain fixed assets such as personal properties (e.g., computers or equipment), land improvements and interior, non-structural parts of a building such as qualified improvement property (QIP). Be aware that the federal bonus depreciation drops to 60% in 2024, so, plan to consider purchasing and placing the fixed assets in service well advance of the 2023 year-end.

5. Review the applicability of the pass-through entity (PTE) tax to work around the Tax Cuts and Jobs Act $10,000 state and local tax deduction limitation. As of early June 2023, a total of 36 states along with one locality (New York city) had adopted the PTE tax. The below states are new to the PTE tax which will come to an effect in 2023 or later –
   1. Arkansas
   2. Arizona
   3. Georgia
   4. Kansas
   5. Missouri
   6. Mississippi
   7. North Carolina
   8. New Mexico
   9. Ohio
   10. Oregon
   11. Utah and New York City.
6. Child tax Credit - $2,000 for 2022 and the refundable amount is up to $1,500.
7. Child and Dependent Care tax Credit – the credit amount is not refundable.
8. If you are over the age of 70.5 and not able to take advantage of itemized deductions, considered making qualified charitable contributions from your traditional IRA.
9. The estate plan – the lifetime estate and gift tax exemption of $12.92M per individual ($25.84M per couple) sunsets on December 31, 2025 and will be reduced to $5M ($10M per couple) indexed for inflation in 2026. With the exemption potentially being cut in half, consider gifting real estate, stock (private or public), closely held businesses or partnership interest to take advantage of the higher exemption.
10. Electronic Vehicle Credit – As a part of the Inflation Reduction Act, the electric vehicle tax credit was extended. The credit now requires that final assembly of the vehicles must be in North America. Need to check for vehicle makes and model, manufacturers, and VIN from the below link to determine if the vehicle purchased qualifies for credit.

    https://afdc.energy.gov/laws/inflation-reduction-act

11. SECURE Act – Changed the IRA distribution rules –Only Eligible Designated Beneficiaries (EDB) can stretch the required distributions out over than life expectancy. To be considered EDB, the beneficiary must be decedent’s surviving spouse, or a disabled, or an individual not more than 10 years younger than the decedent.

    If the beneficiary is not an EDB, then the IRA must be fully distributed within 10 years if the beneficiary is an individual or certain trusts and 5 years for other all beneficiaries.

    The required minimum distribution (RMD) age was increased from 72 to 73 beginning January 1,2023.

12. Roth IRA are post tax dollars and the benefits are –
    1. Not taxable on distributions
    2. Not subject to RMD

    Traditional IRAs can be converted to Roth IRAs. The downside is that you will have to pay tax on the traditional IRA deferrals today.

Looking ahead

2017 Tax Cuts and Jobs Act provisions are set to sunset beginning Jan 1, 2026, impacting individuals and businesses across the board. Individuals will revert to a top rate of 39.6% income tax rate without benefit of the QBI deduction and potentially a 10% rate increase. Deduction will also change with a decrease in the Standard deduction and additions of personal exemptions, miscellaneous itemized deductions, and removal of the state and local tax deduction limitation.

ANSWER QUESTIONNAIRE

(This is not mandatory). It would be good if you take time and fill out questionnaire provided below.