Small Business Tax Planning Strategies for 2023

Keeping track of your small business is hard enough without the looming cloud of tax time. Fortunately, there are ways for small business owners to prepare for tax season.

Establish a Tax-Favored Retirement Plan for Your Business

Current rules allow for generous annual deductible contributions on small business retirement plans.

Consider a simplified employee pension (SEP) plan if you’re self-employed. This plan will allow you to contribute up to 20% of your net self-employment income–axing out at $66,000–toward the 2023 tax year. If you employ yourself through your own corporation, you can contribute up to 25% of your salary, maxing out at $66,000.

Keep your employees in mind as you set up a retirement plan – you may have to cover them, too.

Other Options

Besides SEPs, other small business retirement plan choices include:

  • 401(k) plans,
  • Defined benefit pension plans
  • Savings Incentive Match Plan for Employees (SIMPLE) IRAs.

Your optimal choice depends on your specific tax situation. For example, SIMPLE IRAs benefit businesses with modest incomes. On the other hand, if your company has extra cash for retirement, non-SEP plans may allow for higher deductible contributions.

Note: When setting up a retirement plan, be aware that if your business has employees, you may have to cover them, too.   

You can often establish a plan and make a deductible contribution for 2022. The general deadline for setting up a tax-favored retirement plan, such as a SEP or 401(k) plan, is the extended due date for the return for the year you or your business entity want to make the initial deductible contribution.

Suppose you extended your 2022 personal tax return filing and operated a sole proprietorship or single-member LLC treated as a sole proprietorship for federal tax purposes. In that case, you have until October 16, 2023, to establish a plan and make the initial deductible contribution.

There’s a critical exception, however. To make a SIMPLE IRA contribution for the 2022 tax year, you must have set up the plan by October 1, 2022. If the SIMPLE IRA option is appealing, establish the plan and make the initial contribution by October 1, 2023.

Generous Depreciation Tax Breaks 

Current federal income tax rules allow you to write off certain assets placed in service during your business’s current tax year to account for the first-year depreciation of those assets.

The depreciation rules–and the opportunities they might provide for your business–can include:

  • Section 179 deductions: Qualifying property placed in service in tax years beginning in 2023 can take advantage of Sec. 179’s $1.16 million deduction cap. Sec. 179 deductions gradually phase out as property is placed in service during the tax year. Remember that 179 deductions are complicated by complex tax situations like owning an interest in a pass-through business entity, such as a partnership, limited liability company (LLC) treated as a partnership for tax purposes, or S corporation.
  • First-year bonus depreciation: 80% first-year bonus depreciation is available for qualified new and used property placed in service during the 2023 calendar year. Be sure to write off as much as possible with Sec. 179 deductions before taking advantage of 80% first-year bonus depreciation.
  • Depreciation deductions for heavy SUVs, pickups, and vans: New and pre-owned heavy vehicles (manufacturer’s gross vehicle weight rating above 6,000 pounds) used over 50% for business are eligible for favorable federal income tax depreciation. You should file these vehicles as transportation equipment for Sec. 179 deductions.
  • Depreciation deductions for cars, light SUVs, light trucks, and light vans: Other vehicles used over 50% for business can take advantage of special luxury auto depreciations:
    • $20,200 for year 1 if bonus depreciation is claimed ($12,200 if bonus depreciation is not claimed)
    • $19,500 for year 2,
    • $11,700 for year 3, and
    • $6,960 for year 4 (and any further years until the vehicle fully depreciates)

For vehicles acquired and placed in service in 2023, the $12,200 first-year luxury auto depreciation limit applies only to vehicles that cost $61,000 or more. If first-year bonus depreciation of $8,000 is claimed, the $20,200 first-year luxury auto depreciation limit applies only to vehicles that cost $69,000 or more.

Don’t Stress

Small business accounting is a specialty for the certified public accountants at Borland Benefield. We understand you have your hands full running your business, so let us take the weight of tax season off your back. Contact us at your convenience, and we will get to work.

Steady. Accurate. Consistent.

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