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December 13, 2022

Closely Held Business Year End Updates

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As the end of 2022 rapidly approaches, we at Elliott Davis know that there are many things on the minds of business owners and leaders. This article discusses several items that could be helpful to consider as the year comes to a close.

Bonus Depreciation

The 2017 Tax Cuts and Jobs Act extended and increased the benefit of Section 168(k) depreciation (bonus depreciation) through 2026 with gradual phaseouts. First year bonus depreciation of 100% is in affect for certain assets placed in service after September 27, 2017, but before January 1, 2023. However, unless the law changes, time is running out to take advantage of this big tax benefit.. The bonus depreciation percentage will decrease by 20 points each year over the next few years until it eventually phases out completely. See below for the bonus depreciation rates phaseout schedule:

  • Calendar Year 2022 – 100%
  • Calendar Year 2023 – 80%
  • Calendar Year 2024 – 60%
  • Calendar Year 2025 – 40%
  • Calendar Year 2026 – 20%

Charitable donations limits going back down

The Coronavirus Aid, Relief, and Economic Security Act, commonly referred to as the CARES Act, created a special but temporary tax provision that allows Americans to deduct up to $600 in donations to a qualified charity in 2020 and 2021. This provision applies even if the taxpayer does not itemize their deductions. If taxpayers do itemize, then they can claim charitable contribution deductions for cash contributions up to 100% of their AGI. However, not all of those benefits have been extended to 2022. Therefore, the charitable contribution deduction limit for cash contribution is now back to 60% of AGI in 2022. For C-Corporations, the CARES Act increased the charitable contributions limit to 25% of taxable income for cash contributions to qualified charities in 2020 and 2021. However, this tax benefit has not been extended to 2022. A C-Corporation donor may deduct only up to 10% of its taxable income in charitable donations in 2022.

Meals and entertainment deduction changes

The consolidated Appropriations Act of 2021 brought a temporary exception that allows 100% deduction of food and beverages if purchased from a restaurant in 2021 and 2022. The main purpose of this temporary 100% deduction was to help restaurants survive the effects of the COVID-19 pandemic. A business that primarily sells pre-packaged goods, and an employer-operated eating facility that is operated by a third party are not qualified as restaurants. Therefore, food or beverages from these establishments do not qualify for the 100% deduction. In addition, the IRS clarified that the meal portion of per diem payments incurred in 2021 and 2022 is 100% deductible. However, entertainment expenses remain a disallowed deduction even if directly related to the taxpayer’s trade or business.

Dues and subscriptions

In order for dues and subscriptions to qualify for the business deduction, those expenses must be paid or incurred in relation to a trade or business. The dues paid to professional societies, bar associations, trade associations, and civic organizations are deductible as long as their principal purpose is to help communities rather than providing their members with entertainment. However, in general, taxpayers are not allowed to deduct club dues and membership fees for social and entertainment purposes such as golf clubs, country clubs, and athletic clubs. In relation to the meals and entertainment deduction referenced earlier, the cost of meals at one of these nondeductible clubs could potentially meet the 100% deduction requirements.

States that enacted gross receipts tax instead of income or new filing threshold

A growing trend in state and local taxation is the gross receipts tax. Nevada, Ohio, Oregon, Tennessee, and Washington have all enacted a gross receipts tax which is separate from the income/franchise tax. Nexus is triggered for these taxes through 1) physical presence or 2) exceeding a sales, property, or payroll threshold. Unfortunately, these taxes are not afforded P.L. 86-272 protection. Any taxpayer conducting business in or making sales to any of these states should consider the gross receipts tax filing requirement. Since gross receipts taxes are not measured on net income, taxpayers in loss positions may still owe taxes.

The passage of the Tax Cuts and Jobs Act (TCJA) in 2017 resulted in a $10,000 limitation on individuals deducting state and local taxes. This was a significant change for many high-net-worth individuals who saw great benefit from this deduction. Various states have since passed legislation allowing a pass-through entity, whether a partnership or S-corporation, to calculate and pay taxes at the entity level. This tax is deductible as a business expense for federal purposes and helps restores the benefit of the state and local tax deduction. Each taxpayer’s circumstance should be carefully evaluated as each state has a variety of nuances that need to be considered before making the election.

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

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