2023 Year-End Tax Guide for Businesses (2024)

Each year, Aldrich creates a year-end tax guide with must-know information for your financial plan. Our specialists have compiled the latest insights and opportunities to help you achieve your business goals. The guides are divided into recommendations for businesses and individuals.

We hope this guide serves as a beacon for your upcoming financial planning. If you have questions or concerns about 2023 and 2024 tax planning, please reach out to your Aldrich Advisor.

Employee Retention Credits

To help protect businesses from Employee Retention Credit (ERC) scams, the IRS announced on Oct. 19, 2023, that it would allow “certain” employers to withdraw a claim if they had not yet received a refund—or had not cashed or deposited the refund check. This would help them avoid receiving a refund for which they were ineligible and thus avoid future penalties, repayment, or interest.

Previously in September of this year, the IRS had put a hold on processing all new ERC claims, six months after warning business taxpayers to be aware of potential scams.

A business taxpayer can withdraw an ERC claim only if all the following apply:

1. The taxpayer filed the ERC claim on an amended employment tax return (Forms 941-X, 943-X, 944-X, or CT-1X);
2. The amended employment tax return was filed only to claim the ERC, and no other adjustments were made on the amended return;
3. The taxpayer withdraws the entire amount of the ERC claim; and
4. The IRS has not yet paid the claim, or if it has paid the claim, the check has not been cashed or deposited.

The IRS website provides instructions on how to request a claim withdrawal.

Eligibility and Timeline for ERC Claims

Eligible taxpayers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. Taxpayers have three years from the due date of the original payroll tax return to file an amended return. Amended returns for eligible quarters in 2020 must be submitted to the IRS by April 15, 2024. Similarly, amended returns for eligible quarters in 2021 must be submitted by April 15, 2025.

To receive the credit, employers must have:

• Fully or partially closed operations due to government mandates
• Experienced a significant decline in gross receipts during 2020 and 2021
• Qualified as a recovery startup business for the third or fourth quarters of 2021

This table shows the eligibility thresholds in 2020 and 2021:

ERC Eligibility Thresholds

Aldrich Insights

While the IRS has not specifically advised taxpayers not to file new claims during the moratorium, we recommend avoiding filing, since new claims won’t be processed. Once the hold is lifted and before submitting a return, taxpayers should consult with their Aldrich Advisor to determine their eligibility—and thus protect their business from illegal and costly tax schemes.

Depreciation Tax Planning

Depreciation planning is a valuable strategy for taxpayers to manage their tax liability for years to come. This strategy is particularly useful for businesses with tangible assets that help generate revenue, like farming or manufacturing equipment, as it can help recover the costs of these major asset investments.

The Tax Cuts and Jobs Act of 2017 (TCJA) increased bonus depreciation by allowing business taxpayers to deduct 100% of eligible asset expenses upfront from their taxable income rather than having to depreciate the cost over several years.

100% bonus depreciation was available for assets placed in service from September 28, 2017, through December 31, 2022. Starting Jan. 1 of this year, bonus depreciation dropped 20 points to 80%, with 20-point drops scheduled every year after—ending on December 31, 2026.

Bonus Depreciation Schedule

Aldrich Insights

If large equipment purchases are happening in the near term, it may be in your best interest to accelerate those purchases into 2023 if they can still be received and placed into service before year-end. Other factors, such as cash flow planning, should also be considered.

SECURE Act 2.0

The SECURE Act 2.0 has several important, mandatory provisions going into effect in 2024 and beyond, and corporate retirement plans are eager to create a compliant path forward with new processes, procedures, and employee communication. Here are three key provisions to be aware of and plan for now:

Long-Term Part-Time Employees

The rules from SECURE 1.0 (Section 112) pertaining to long-term part-time employees remain in effect, regardless of the changes brought by SECURE 2.0 (Section 125), which reduced the time period from three consecutive years to two.

With SECURE 1.0, if you have employees who have worked more than 500 hours for three consecutive years (2021, 2022, and 2023), they need to be permitted to enter the 401(k) portion of your plan on Jan. 1^,2024. You do not, however, need to offer them employer contributions unless they meet those eligibility rules.

Regarding excluded employees, there are two types: class exclusions and service exclusions. Class exclusions, such as “all San Diego office employees are excluded,” can continue as is. However, service exclusions, like “all temporary workers who work less than 750 hours,” may now require inclusion in the plan starting Jan. 1, 2024.

Moving forward, under SECURE 2.0, the time is reduced to two consecutive years. Employees who work more than 500 hours for two consecutive years (2023 and 2024) become eligible for the 401(k) plan on Jan. 1, 2025. Class and service exclusion rules, as well as employer contribution rules, remain applicable.

Aldrich Insights

Most plans are likely well-informed about the Long-Term Part-Time Employee provision of SECURE 1.0 and its impact on their plan. However, those without a clear understanding should review their eligibility provisions and exclusion rules to identify eligible employees who may need to join the plan on Jan. 1, 2024. These individuals might not be in the recordkeeping system, necessitating proper setup and timely plan disclosures.

Required Roth Catch-Up Contributions

On Aug. 23, 2023, the IRS changed the implementation date of the new Roth catch-up contribution requirement from Jan. 1, 2024, to Jan. 1, 2026. Currently, the maximum individual contribution to a 401(k) plan is $22,500, referred to as the “standard contribution.” Participants over 50 can make an additional “catch-up contribution” of $7,500 (IRC 414(v)). When combining both contributions, the total maximum 401(k) contribution from pay is $30,000.

Starting Jan. 1, 2026, if you make more than $145,000 in 2025 and wish to make a catch-up contribution in 2026, the catch-up contribution can only be made as a Roth contribution (your standard contribution, however, can still be made as either a pre-tax or Roth contribution).

Aldrich Insights

When the time comes to prepare for Roth catch-up contributions, plans should closely follow communications from their recordkeeper and promptly contact their payroll provider to finalize the year-end process for flagging accounts. Additionally, plans should understand how contribution elections are managed in their current plan and anticipate changes for impacted accounts starting Jan. 1, 2026. Once further guidance is available, educating plan participants with timely reminders before the new year is recommended, particularly for those requiring action.

Increased Force-Pay Threshold—Section 304 

Starting Jan. 1, 2024, section 304 of the SECURE Act 2.0 will allow employer retirement plans to force out terminated participants with a balance of $7,000 or less—up from $5,000. This “force pay” provision essentially allows accounts to be transferred from a plan to a third-party IRA solution. Plans that implement this optional increase may be able to further reduce the number of participants in their plan with balances.

Aldrich Insights

The threshold increase, along with a new participant-counting methodology, could offer a path for many plans to step out of audit status in the year ahead. Earlier this year, the US Department of Labor (DOL) announced significant changes for the 2023 Form 5500 and Form 5500-SF filings, including how participants in a plan are counted—a crucial factor in determining whether a retirement plan would require an audit for the upcoming plan year.

For example, if your plan did not require an audit in 2022, it would need to have 120 or more participants with an account balance on Jan. 1, 2023, to trigger an audit requirement for 2023. On the other hand, if your plan did require an audit in 2022, it would no longer need an audit for 2023 if it has fewer than 100 participants with an account balance on Jan. 1, 2023.

We generally encourage plans to adopt this forced-pay increase threshold. Having fewer plan participants with balances and this new counting methodology could eliminate audit requirements for many plans—saving substantial time and costs. Please speak with your Aldrich Wealth advisor before determining a course of action.

Shell Companies + Beneficial Ownership

Starting Jan. 1, 2024, businesses created in or registered to do business in the United States will be required to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Beneficial owners are the persons who ultimately own or control the company.

These entities include corporations, limited liability companies, and any entity created by filing documents with a state Secretary of State’s office. This encompasses limited partners, limited liability partnerships, and most business trusts—but not Schedule C businesses or general partnerships.

However, there are more than 23 exemptions available, including for large operating companies (those with 20 full-time US employees) or highly regulated companies such as public accounting firms, securities dealers, and investment companies and advisors. The exemptions mainly cover businesses that are already highly regulated by the federal government.

These requirements are part of the Corporate Transparency Act and aim to unmask shell companies—legal entities that exist on paper but have no physical presence, active business operations, or significant financial assets. While shell companies have legitimate purposes, they are also used for questionable or criminal activity, from tax evasion to money laundering.

Aldrich Insights

If you created or registered your company before Jan. 1, 2024, you must file by Jan. 1, 2025. Companies registered on or after Jan. 1, 2024, have 30 days to file. FinCEN will not accept beneficial reporting information prior to that date.

Reports must include your company’s legal name and any trade name or “doing business as,” street address, the jurisdiction in which it was first formed or registered, and Taxpayer Identification Number.

Each of your company’s beneficial owners must provide their legal name, birthdate, address, and identifying number from an image of an approved document, such as a driver’s license or passport. FinCEN defines a beneficial owner as an individual who “exercises substantial control” over your company or who owns or controls at least 25% of your company.

While FinCEN says it will keep the reporting process as simple as possible, the reporting portal is not available yet. We recommend consulting with your lawyer for assistance on determining which entities are ultimately required to do this reporting and which individuals need to be reported as beneficial owners.

R+D Tax Credits

The Tax Cuts and Jobs Act of 2017 amended Section 174 of the federal tax code in 2022. Up to that time, Section 174 allowed business taxpayers to choose to either deduct qualified research and experimentation (R+E) expenses or capitalize and amortize them over time.

Taxpayers who chose to deduct these expenses could receive tax benefits through Section 41, which governs research and development (R+D) credits. This, in turn, would incentivize taxpayers to continue investing in R+D.

Now, however, business taxpayers must capitalize and amortize domestic R+E expenditures over five years and international R+E expenditures over 15 years. Deducting all qualified R+E expenses in the year incurred is no longer an option.

Now that companies are required to amortize R+E costs, deferring and spreading out their tax deduction, they’re faced with higher after-tax costs of R+D and higher tax payments than prior years.

The American Innovation and R&D Competitiveness Act of 2023, introduced on April 18, 2023, aims to eliminate the five-year amortization requirement for R+E expenses, allowing them instead to be expensed in the taxable year in which they are incurred.

Aldrich Insights

If and until such legislation is enacted, businesses should be prepared to identify which costs they can amortize and capitalize over time. Since there is room for interpretation as to what qualifies as an R+E expenditure, we recommend working with your Aldrich Advisor to identify these expenses.

Currently, you can potentially claim approximately 10% of your annual R+D costs for the federal credit, and there is no limit on the total amount you can claim. Remember, this is a tax credit, not a deduction. It gives your business a dollar-per-dollar reduction in your tax bill, which is more generous than a deduction.

Even though the credit is non-refundable, if you don’t owe enough taxes to use the entire earned credit, you can carry it forward for up to 20 years to offset future taxes.

New small businesses and startups with gross revenues below $5 million and no gross receipts dating back five years can also use the research and development tax credits to offset their payroll (FICA) taxes up to $500,000.

In addition, eligible small businesses (ESBs) may also use this credit against any owed alternative minimum tax (the IRS defines an ESB as one that is not publicly traded and has averaged less than $50 million a year in revenue over the past three years).

Finally, businesses should consider eligibility for their state’s R+D tax credits—at least 35 states offer these credits.

International Updates

Foreign Derived Intangible Income (FDII)

In 2017, theTax Cuts and Jobs Act (TCJA)created the Foreign-Derived Intangible Income (FDII) benefit, an export incentive to encourage US businesses to maintain their operations in the US and sell to customers outside the US. FDII has a broad definition of sales to foreign customers, so many companies operating in the US may already qualify for an FDII benefit but aren’t taking advantage of it.

FDII created a significant tax benefit for US companies selling goods and services overseas. As a result, US companies may get a corporate tax rate of 13.125% on sales to foreign people for foreign uses. FDII essentially created two income categories for US C Corporations: FDII income taxed at 13.125%, and non-FDII income taxed at 21%.

Aldrich Insights

The FDII incentive is expansive and is available for most foreign sales, including property sales, services, royalties, and intercompany transactions. Nevertheless, there are common limitations on which US taxpayers and transactions qualify for FDII. For example, the taxpayer must be a US C corporation, and the lower tax rate only applies to sales to foreign people for foreign uses.

Ultimately, C Corporation taxpayers in a taxable income position could have a significant tax benefit related to their foreign sales. We recommend consulting your Aldrich tax advisor if you think the FDII deduction may apply to your company.

Business Transitions

Transitioning from business ownership to retirement is a complex process that demands careful planning and consideration. To ensure a smooth transition that aligns with personal and business goals, it’s crucial to start planning well in advance. As you begin planning for next year, consider adding transition planning to your roadmap.

With a variety of tax and estate implications, our Capital Advisors outlined a few key concepts to ensure you’re set up for success:

1. Alignment of Personal + Business Goals: Begin by evaluating whether your personal, financial, and business goals are in sync with a business transition. Consider how selling the business will help achieve your personal objectives, and plan for a seamless transition to avoid unnecessary stress.
2. Finding Purpose: Business owners often grapple with a loss of identity and purpose after selling their business. Before proceeding, define what you want the next phase of your life to entail. Consider legacy, helping family members, starting a new venture, or other aspirations.
3. Comprehensive Financial Planning: Develop a well-structured financial plan that integrates all your assets and income streams. Calculate the after-tax proceeds needed to support your desired lifestyle and wealth transfer goals post-sale. Explore different financial scenarios related to the sale.
4. Tax Planning: Selling a business has complex tax implications, influenced by factors such as business structure and sale type (stock or asset). Early consultation with a tax professional can help mitigate tax consequences. Consider options like installment sales to spread tax liability.
5. Estate Planning: Revisit your existing estate plans, taking advantage of the current gift and estate exemption. This exemption may change, so explore strategies to shield a larger portion of your assets from estate taxes if your financial plan permits.
6. Charitable Giving: If inclined, consider charitable giving in the year of the business sale to offset tax burdens. Explore tax-advantaged options like donor-advised funds or charitable trusts in collaboration with a financial advisor.
7. Preliminary Due Diligence: Ensure all documentation and operations are prepared for a smooth transition. This includes updating contracts, securing insurance, and ensuring IT systems are up to date.
8. Financial Statements: Prior to transitioning, ensure your financial records are organized and capable of withstanding third-party scrutiny. Conduct an internal audit, establish key performance indicators, and track metrics to enhance transparency and attract potential buyers.
9. Establish Your Team: Different exit strategies exist, and the appropriate one depends on your goals. Assemble a team that understands your objectives, assesses the company’s value, and collaborates with you to identify the right transition option.
10. Ongoing Process: Transition planning is not a one-time event but a continuous process. It takes time to execute successfully.

Aldrich Insights

Planning for a business transition to retirement is a multifaceted endeavor. By aligning personal and business goals, crafting a solid financial plan, addressing tax and estate considerations, and assembling the right team, you can ensure a successful and fulfilling transition. Start early, stay organized, and adapt your plan as needed to achieve your desired outcome.

Regional Updates

California Partnership Capital Account Reporting Requirements

Starting in taxable year 2023, partnerships and limited liability companies taxed as partnerships must report partners’ and members’ capital account information using the “tax basis method.” This method is described in the2022 Instructions of IRS Form 1065, but is calculated under California law on Schedule K-1 (565) and Schedule K-1 (568).

This requirement initially took place in the 2021 tax year, but the California Franchise Tax Board (FTB) acknowledged the difficulty in complying with the reporting requirement on the original schedule. The FTB thus delayed the requirement in FTB Notice 2023-01, allowing reporting of the tax basis method to be determined under either federal or California law for the 2021 and 2022 tax years.

Starting in tax year 2023, however, taxpayers filing Forms 565 or 568 will be required to report the partners’ or members’ capital accounts under the tax basis method defined under California law.

Aldrich Insights

Partnerships whose California taxable income differs from their federal taxable income should assess how to implement these reporting requirements. Complying with the new requirement will likely include compiling and analyzing historical partnership data as well as identifying California tax differences that will modify the federal tax basis amounts.

California COVID-19 Paid Sick Leave Grants

Qualified California small businesses can apply for a one-time grant through the California Small Business and Nonprofit COVID-19 Supplemental Paid Sick Leave Relief Grant Program (CASPL). These businesses must be currently active, incurred costs for providing COVID-19 Supplemental Paid Sick Leave between Jan. 1 and Dec. 31, 2022, and had 26 to 49 employees during that period.

Funding for the program is limited and will be awarded based on eligibility and availability of funds. Grant amounts will range between $5,000 and $50,000, depending on how much COVID-19 Supplemental Paid Sick Leave the business provided to its employees.

Aldrich Insights

Like the earlier state-provided COVID-19 relief grants of up to $25,000, these grants are “excludable” from California gross income; however, the authorizing legislation for these grants does not allow for businesses to deduct expenses paid with these grants.Taxpayers who claimed a deduction for the sick leave benefits paid on their 2022 return will have to file an amended return to add back these wage expenses when they receive the grant in 2023.

Businesses should sign up for alerts on the CASPSL website to be notified when the applications open. The website also provides additional information concerning eligibility and required documentation.

Preparing for 2024 + Beyond

As a reminder, we recommend keeping all relevant tax documents on hand for a minimum of seven years. Here’s a detailed chart with record retention best practices.

We know that your business faces unique challenges based on the industry, employees, and region. Our expertise can help you navigate the nuances of financial planning to help you achieve your goals. Your Aldrich Advisor is here to provide support and answer your questions. Reach out today to schedule a meeting to discuss your 2023 tax plan.

This year-end tax planning guide is based on the prevailing federal tax laws, rules, and regulations. It is subject to change, especially if additional tax legislation is enacted before the end of the year. Your personal circ*mstances will likely require careful examination.

This guide was written with the most current information as of October 2, 2023. Please continue to check back for future updates.

Tax insights and advice included in this document may not describe all relevant facts or analysis of all relevant tax issues or authorities. This document is solely for the intended recipient’s benefit and may not be relied upon by any other person or entity.