Year-end Planning

2022 is rapidly coming to an end.  The DBM team has a few final suggestions as well information for you to consider for 2023 planning.

Deducting bonus depreciation

You will want to consider taking advantage of bonus depreciation, which allows a business to take an immediate write-off of 100% of an asset’s cost, beginning with assets purchased and placed in service after September 27, 2017. Currently, this applies to new and used property. The deductible amount is reduced to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 before disappearing in 2027.   

If you’re involved with a vineyard and have recently planted vines, the bonus depreciation rules can be applied when the vines are planted or placed in service.  The bonus depreciation election can only be made one time, at the time of planting or the time the vines are placed in service.

For all other business entities, bonus depreciation applies to equipment purchases and vehicles.  Some software and qualified leasehold improvements may qualify as well.

Limitation on Business Interest

Internal revenue code section 163(j) imposed a limitation on the deduction for business interest expense for years beginning after December 31, 2017.   This applies to taxpayers with gross receipts of $27 million in 2022.   The amount of interest expense cannot exceed the sum of the taxpayer’s business interest income, 30% of the taxpayer’s taxable income, depreciation expense and amortization expense.    Beginning in 2022, the limitation will exclude depreciation and amortization expense in the computation.   This change may limit your deduction for business interest even if you haven’t previously been subject to this limitation. 

California Pass-through entity tax election

The California pass-through entity tax (“CA PTET”), also known as the Small Business Relief Act, is effective for taxable years beginning on or after January 1, 2021 and will sunset on December 31, 2025.  The CA PTET is in addition to and not in place of any other tax or fee that may apply to the entity.  It is an elective tax made by the partners, shareholders, or other qualified members of a pass-through qualified entity allowing the entity to make the tax payment on behalf of the qualified members at a rate of 9.3% of the entities net income including guaranteed payments.   For 2022, an amount equal to the higher of $1,000 or 50% of the amount paid for 2021 was required to be paid on June 15, 2022.   If an additional payment is needed for 2022, the taxpayer may want to consider making the payment in December 2022 in order to receive the federal tax deduction for the state tax expense paid by the qualified pass-through entity.

Meal and Entertainment deduction

The taxpayer should consider reviewing their general ledger and chart of accounts to be sure meals are classified correctly.   Historically, the deduction for food or beverage expenses is limited to 50% of the otherwise deductible amount, but for 2022, 100% deduction is allowed for food and beverages provided by a restaurant.   Restaurant is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption regardless of whether the food or beverages are consumed on business’s premises, but not a grocery store, specialty food store, beer, wine or liquor store, drug store, convenience store or vending machine.  For any questions regarding how these rules may apply to you, please call or send us an email.

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