A proactive approach to tax preparation can help minimize your tax bill and allow for more flexibility in planning
Although only a few areas of tax law had significant changes for 2024, many companies experienced operational and economic changes that could change their tax strategies. Additionally, with major provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) set to expire at the end of 2025 unless extended by Congress, the potential impact on businesses could be significant. It's important to understand how potential changes like these, among other considerations, may affect your tax strategies moving forward.
Here are a few considerations to keep in mind and action items to address for your business as you plan for the remainder of the 2024 tax year.
Asset purchase considerations
Bonus Depreciation – For 2024, a business may deduct 60% of the cost basis of qualified property placed in service. The expanded bonus depreciation will drop to 40% of cost basis in 2025. Of course, the portion of cost basis of qualified property not allowed as bonus depreciation will be depreciated used normal lives and methods.
Qualified property includes personal property such as computers or equipment, land improvements, and qualified improvement property (interior, non-structural parts of a building). This includes used assets that are purchased used but are new to the taxpayer.
If you expect to need any of the above during 2025, consider purchasing them and putting them into service as quickly as possible before the end of 2024. Consider how any net operating losses and your expectation of potential changes to tax rates in 2025 may affect this tax planning.
Even if bonus depreciation isn't a consideration, discuss any assets acquired during this year with your tax professional. Asset purchases may have a variety of effects on your tax reporting. Also discuss any asset purchases that may be in progress or contemplated for 2025; it may make sense for you to speed up acquisitions into 2024 or hold them for 2025.
Changes to claiming research and experimental expenses
Capitalization of research and experimental expenses – Starting in tax years beginning after December 31, 2021, research and development expenses can no longer be expensed immediately. U.S.-based R&E expenses now must be capitalized and amortized over five years; non-U.S. expenses must be capitalized and amortized over fifteen years. Amortization begins with the midpoint of the taxable year in which the expenditure was paid or incurred. In addition, all software development expenses must now be capitalized and amortized in the same fashion. This is a major departure from the previous Internal Revenue Code Section 174 Research & Experimentation Expenditure rules, which allowed the immediate deduction of such expenditures.
Although the above tax law change was expected to be modified or repealed in 2024, this did not happen. At this time, none of the budgetary proposals being considered by Congress during the election year of 2024 or 2025 contain modifications to Section 174. We anticipate that research and experimental expenses will continue to be capitalized and amortized in 2024 and 2025.
Disaster losses
Natural disasters – If your business has been impacted by natural disasters, consider whether it makes sense to accelerate disaster losses under IRC Section 165(i). This may give you faster access to much-needed cash. If you accelerate losses, you may be able to request a "quick refund" by filing Form 4466.
Transfer Pricing Studies
Transfer pricing studies – For businesses which buy or sell products and services to related companies in other states or overseas, consider whether it's time to perform an initial or update your transfer pricing study. These studies must be updated regularly to demonstrate these related party transactions are priced "at arm's length. While companies must provide a transfer pricing study within 30 days upon request by the IRS in an audit, they should proactively prepare a transfer pricing study. A well-supported and contemporaneously documented transfer pricing report allows the IRS to rely on the company's analysis of functions, risks, intangibles, value drivers, etc. This helps support early deselection of the transfer pricing issue by the IRS from further examination.
State and local tax impacts
Remote employees – States continue to expand their rules regarding collection of state sales taxes when doing business across state borders. Multi-state businesses may need to increase emphasis on planning for state taxes.
In addition, more states are seeking to apply economic nexus for income tax purposes. Businesses with employees who worked from home in other states, even for part of the year, may have nexus in that state. This means you may have taxable income that must be apportioned to that state and need to file state tax returns, possibly where you haven't done so in the past. You may also not have paid required estimated state taxes in those states.
Even if this isn't a new tax filing state for your business, work-from-home employees may increase the apportioned income in those existing states, increasing your income tax attributed to those states.
Speak with your tax advisor about whether conducting a nexus study may make sense for your business.
Pass-through entity taxes – Many states have enacted statutes that provide some relief for owners of partnerships or subchapter S corporations (PTE's). PTE's in these states may elect to have the state tax the PTE rather that the non-resident individual owners. This will allow the PTE to deduct the state income tax for federal income tax purposes in excess of the $10,000 state and local tax limitation (SALT cap) imposed on individual taxpayers. This may result in substantial income tax savings. Contact your KR tax professional for more information.
IRS backlogs
IRS backlogs mean many situations have been unresolved for years to months; discuss with your tax team any plans you can make to minimize the ramifications of these delays. And follow up on refunds expected to cover required estimated payments, as these may not have been processed yet.
Other considerations
- Consult with your tax advisor to maximize owners' and partners' qualified business income (QBI) deductions. For example, it may make sense to pay bonus wages to employees during the current calendar year, or to otherwise change timing and distribution of income
- Consider retirement plan enhancements. Employers have until the company's income tax return deadline to adopt or modify a plan that can be treated as if adopted on December 31 of the tax year.
- If the company has had any ownership or tax-status changes, note this and gather documentation for your tax professional.
- Confirm tax information from contractors or companies that require 1099s or other tax reporting; 1099s and W-2s must be sent out by January 31.
- Your internal accounting and/or bookkeeping team should begin to gather documentation, including depreciation schedules for equipment and assets, employment tax documentation (such as W-9s and I-9s), and payroll reports.
As the sunset of the TCJA provisions draws closer, and with the upcoming election potentially influencing tax policy, it's crucial to assess the potential impacts on your business so you can prepare accordingly. Contact your Kaufman Rossin tax advisor to learn more about what you can do now to avoid tax surprises, optimize your 2024 tax bill and start preparing for 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.