by Rachele Gregory, Gunner Huggins and Jessica Kyt

This article discusses several items that are changing in the 2023 tax landscape. These changes include topics such as bonus depreciation, meals and entertainment deductions, charity donations, estate tax exemptions, and some state tax changes to consider.

Section 168(k) (Bonus Depreciation)percentage decreasing

Depreciation is an important component of business tax planning, and changes in depreciation regulations can have a major influence on a company’s bottom line. The reduction of the bonus depreciation percentage is one major change to depreciation in 2023. 2022 allowed for 100% of the cost of eligible assets to take bonus depreciation. The percentage is decreasing to 80% in 2023 and will continue to phase out over the next several years. For the next five years, the bonus percentage will decrease by 20 percentage points a year until it is completely phased out, barring any changes to the law as is depicted in the chart below:

  • Calendar Year 2023 – 80%
  • Calendar Year 2024 – 60%
  • Calendar Year 2025 – 40%
  • Calendar Year 2026 – 20%

Section 179 deduction

The section 179 deduction allows taxpayers to write off the entire purchase price of qualifying equipment up to the deduction limit. In recent years qualifying equipment was expanded to include used and new equipment, and this change remains in effect for 2023. The section 179 deduction limit for 2023 was raised to $1,160,000 (up from $1,080,000 in 2022) and the total equipment purchase limit was raised to $2,890,000 (up from $2,700,000 in 2022).

Meal deduction reverts back to 50%

The Consolidated Appropriations Act of 2021 included a temporary provision that permitted a 100% deduction for food and beverages purchased from a restaurant in 2021 and 2022. Beginning in 2023, most expenses for meals have returned to the previous limitation of 50%. The Tax Cuts and Jobs Act generally eliminated the deduction for any entertainment expenses, making them 100% non-deductible for tax purposes. This continues to be in effect for 2023. Below is a quick reference guide for what meals and entertainment expenses fall under each limitation.

Type of ExpenseDeduction
Food for employee events, such as holiday parties100%
Meals that are included as taxable compensation for the employee or independent contractor100%
Meals provided to employees for the convenience of the employer100%
Meals provided in office for meetings of employees, shareholders, agents, or directors50%
In office snacks50%
Food items such as soda, coffee or snacks for employees50%
Meals while traveling for work50%
Meals at conferences50%
Entertainment0%

Cash charitable contributions limited

Tax breaks have long been used to encourage charitable contributions. The CARES Act included a temporary provision that allowed taxpayers to deduction 100% of their adjusted gross income (AGI) for cash charitable contributions in 2020 and 2021. In 2022 the provision expired and the cash contributions were once again limited to 60% of AGI. The 2023 limitation will continue to be 60% of AGI.

Gift and estate tax exemptions are increasing 

The annual gift tax exclusion and gift and estate tax exemption are increasing significantly for 2023. The gift tax annual exclusion is the amount that a taxpayer may give to any number of individuals and certain types of trusts tax free and without using up any of your gift and estate tax exemption. The gift and estate tax exemption is the value that you can transfer during your life or at your death without incurring estate tax. These amounts, which are adjusted each year for inflation, are as follows (amounts shown are per taxpayer and are doubled for married couples):

  • Gift Tax Annual Exclusion – $17,000 (increased from $16,000 in 2022)
  • Gift and Estate Tax Exemption – $12.92 million (increased from $12.06 million in 2022)

Individual tax brackets and rates  

The IRS has announced its annual inflation adjustments for the 2023 tax year. Those adjustments include an increase in the thresholds for federal tax brackets for individual income taxes. Below are two charts that detail the tax bracket tables for 2022 and 2023.

2022 Federal Tax Brackets and Marginal Rates
Tax RateSingleMarried Filing JointHead of Household
10%$0 – $10,275$0 – $20,550$0 – $14,650
12%$10,276 – $41,775$20,551 – $83,550$14,651 – $55,900
22%$41,776 – $89,075$83,551 – $175,150$55,901 – $89,050
24%$89,076 – $170,050$178,151 – $340,100$89,051 – $170,050
32%$170,051 – $215,950$370,101 – $431,900$170,051 – $215,950
35%$215,951 – $539,900$431,901 – $647,850$215,951 – $539,900
37%$539,901 or more$647,851 or more$539,901 or more
2023 Federal Tax Brackets and Marginal Rates
Tax RateSingleMarried Filing JointHead of Household
10%$0 – $11,000$0 – $22,000$0 – $15,700
12%$11,001 – $44,725$22,001 – $89,450$15,701 – $59,850
22%$44,726 – $95,375$89,451 – $190,750$89,851 – $95,350
24%$95,376 – $182,100$190,751 – $364,200$95,351 – $182,100
32%$182,101 – $231,250$364,201 – $462,500$182,101 – $231,250
35%$231,251 – $578,125$462,501 – $693,750$231,251 – $578,100
37%$578,126 or more$693,751 or more$578,101 or more

Research and Development Expenses under Section 174(a) Internal Revenue Code Section 174 covers tax treatment of a taxpayer’s research and experimental (R&E) expenditures. For taxable years beginning prior to January 1, 2022, taxpayers had the option to currently deduct R&E expenditures or to defer and amortize the expenditures over a period of not less than 60 months. For taxable years beginning after December 31, 2021, Section 174(a) taxpayers only have the option to amortize R&E expenditures over 5 years for domestic expenditures or 15 years for foreign expenditures. The nuances surrounding this code section and treatment of section 174(a) expenditures can be complex. We discuss this further in this article.

Tennessee Works Tax Act Updates:

The Tennessee Works Tax Act, signed earlier this May, introduced significant tax cuts for entities conducting business in Tennessee.  Several noteworthy changes include a new standard excise tax deduction, the adoption of bonus depreciation, and plans to implement single sales factor apportionment for franchise and excise taxes.

The new standard excise tax deduction allows entities to deduct $50,000 from net earnings when calculating TN excise tax for tax years ending December 31, 2024. Further, the new act aligns Tennessee with the federal bonus depreciation provisions of the Tax Cuts and Jobs Act. The below schedule outlines the percentage of bonus depreciation applicable to assets purchased on or after January 1, 2023. The Act also transitions Tennessee from a three-factor apportionment formula to a single sales factor apportionment formula over a three-year period.

Asset Acquired Between:Bonus Percentage:
1/1/2023 – 12/31/202380%
1/1/2024 – 12/31/202460%
1/1/2025 – 12/31/202540%
1/1/2026 – 12/31/202620%
1/1/2027 – 12/31/20270%

North Carolina law updates IRC conformity and revises the Pass-through Entity (PTE) election

North Carolina Senate Bill 174 was signed into law April 3, 2023.  This bill updates corporate and individual income tax conformity as of January 1, 2023 (previously, April 1, 2021) and adds important updates to the pass-through entity (“PTE”) election for taxpayers. PTE elections allow pass-through entities the option to be taxed at the entity level to help their residents avoid the $10,000 limit on federal itemized deductions for state and local taxes. Updates include the following: 1) beginning in tax year 2022, a pass-through entity with a pass-through partner is allowed to make a PTE election, 2) beginning in tax year 2023, the tax base will only include North Carolina resident’s apportioned income, 3) beginning in tax year 2023, owners will be allowed either a deduction or credit for taxes paid to other states in order to avoid double taxation.

Conclusion

As you’re evaluating your 2023 tax strategy, our team can help make sense of the changes and updates we’ve seen this year and determine the best path forward for you and your business. Contact us to get started.