7 last-minute moves to reduce your company’s 2023 tax bill

(This column originally appeared in The Inquirer)

It’s December, so here are seven moves you may be able to make this month that can help take a bite out of your company’s 2023 tax bill. These suggestions should be discussed with your tax expert because they may not all be applicable to everyone.

If you purchase certain qualified assets, which may include equipment, computer software, hardware, and furniture, you can deduct 80% of that cost this year (the rest you have to depreciate over the life of the asset). It’s called “bonus depreciation.” Next year, the first-year deduction drops to 60%. To make the deduction, the asset has to be placed in service by the end of 2023, and you can take the deduction even if you’ve financed the asset and haven’t started to pay for it yet.

Whether you’re a solo entrepreneur or a business owner with employees you should have a retirement plan like a 401(K), regular IRA, Solo 401(k), SEP IRA, or a SIMPLE IRA. Make sure you’re contributing as much as you can to these plans. The maximum contribution can range anywhere from $6,500 to $22,500 depending on the type of plan you have, and there are additional contributions you can make if you’re over 50 years old. These contributions are made “pretax” and reduce your taxable income.

In addition to these traditional retirement plans, make sure you’ve also got a Roth plan. The contribution limits are approximately the same if you have either an individual Roth IRA or Roth 401(K) so put as much money as you can into those accounts as well. Different than the retirement plans above — which only defer your taxes to the future — these contributions are “after-tax” which means they grow tax free forever and can be withdrawn at any later date without a tax penalty.

Don’t worry if you delay. Assuming your company is on the accrual-basis method of accounting, then you can make these contributions up to two-and-a-half months after the calendar year and still be able to take the deduction for 2023.

The Employee Retention Tax Credit has come under scrutiny of late because of a few bad actors, but if your business was impacted by a loss of revenues or a shutdown during 2020 or 2021 you may be eligible to take this tax credit against the payroll taxes you paid. If the credit is more than what you paid you’ll be entitled to cash back. Talk to your accountant or payroll service to find out if you’re eligible and consider amending your prior payroll tax returns. The IRS has temporarily suspended processing this credit, but is expected to resume in the near future.

If you’re like most of my clients, you probably have older invoices that remain due from customers. It’s good to be optimistic, but it’s more important (and fiscally sound) to be realistic. If a receivable is over 90 days old and probable of nonpayment, then write it off your books so you can at least take the tax deduction. The same goes for old inventory. If it’s been a few years and you still haven’t sold it, dispose of it and take the deduction. Cleaning up your balance sheet can be painful, but there are good tax reasons to do it.

Holiday breaks for schools are starting soon, so my suggestion is to employ your kids — or even your employees’ kids. You can pay them up to $13,850 — the amount of this year’s standard deduction — and unless they have other sources of income they’ll pay no income taxes (they may incur state and other payroll-related taxes).

Every business owner I know agrees that finding and retaining good talent is a major challenge. If your business has had a profitable year then instead of giving a share of those profits to the government why not instead give it to your employees? By paying year-end bonuses you can take a tax deduction, and it may go a long way towards reducing turnover and keeping your employees — your most important asset — happy. Similar to a retirement plan the payment doesn’t need to be made until two-and-a-half months after the year ends, assuming you’re an accrual-based business.

Businesses operating on the cash-basis (some choose this if their average sales are over $1 million but less than $5 million, among other criteria) are allowed to reasonably defer income to the future and accelerate expenses into this year with both moves helping to reduce your 2023 taxable income.

As a certified public accountant I don’t enjoy giving last minute tax tips. Why? Because my best clients don’t operate this way. They recognize that their tax bill is one of the largest expenses they have and they plan accordingly by meeting with their tax experts well in advance. Hopefully you’ve done that. But if not, then these moves may help reduce the burden.