Can you believe that half of 2023 is over? The first half of the year has been a rocky one economically speaking. There were several interest rate hikes from the Federal Reserve, inflation moderated somewhat, and the debt ceiling crisis was averted. But according to the NFIB Survey for May 2023, optimism among small business owners continues to be well below the historic average. There are still supply chain disruptions and labor shortages. Where does your business stand? In order to do any tax planning, you need to assess your business performance for the first half of the year.
Tax planning related to your mid-year business assessment
Ideas for businesses doing well
If your business is profitable and you don’t see problems arising, use tax strategies to reduce your tax bill for the year:
- Buy machinery and equipment. Perhaps you’ve been delaying this or continually making repairs. Now is a good time to upgrade, and tax savings can help with the cost. You can elect to expense the cost of eligible property—machinery and equipment, building signs, certain livestock, and more—up to $1,160,000 in 2023 (assuming you have sufficient taxable income). Find details about this first-year expensing option, also called a Sec. 179 deduction, in IRS Publication 946, How to Depreciate Property (the publication does not reflect 2023 deduction limits). Note: In addition to tax savings, you may also get energy savings; check energy consumption for new items.
- Fund qualified retirement plans. Many small employers use 401(k)s, which enable them to offer a benefit without having to incur a cost (other than administrative expenses). But if business is good and employee retention is a concern, contributing to employees’ accounts can have tax benefits. Contributions are deductible. And new for 2023, contributions on behalf of employees earning less than $100,000 qualify for a tax credit of up to $1,000 (no deduction is allowed to the extent of the credit). Don’t have a qualified retirement plan? Start one can you can get a tax credit for doing so, plus another credit for using an automatic enrollment feature.
- Expand your research activities. There’s a tax credit for doing R&D used for product development or finding new methods for internal operations. In 2023, small businesses can use the credit, which usually reduces income tax, to offset up to $250,000 of their Social Security portion of FICA and another $250,000 to offset the Medicare portion. Check the instructions to research credit for Form 6725, Credit for Increasing Research Activities to learn more.
- Buy electric vehicles. If you need a vehicle for your business, look into plug-in electric vehicles. You may be eligible for a federal tax credit, and there may be state tax breaks as well.
Ideas for businesses underperforming their expectations
If your business hasn’t done well, forecast what you think will happen in the second half of the year. If you don’t expect significant improvement and are just hanging on, consider how taxes can help.
- Reduce estimated taxes for the rest of 2023. There are two payments remaining: one in September and one in December for calendar year C corporations or January 2024 for owners of pass-through entities. Reducing the payments gives you more cash to use in your business.
- Get a handle on inventory management. It’s been said that bad inventory management is a big reason why some businesses fail. Don’t make mistakes that can make you just such a statistic. Business News Daily offers 10 tips for effective inventory management.
- Meet with your CPA or other tax adviser. Don’t wait until the end of the year to find ways that can help your business on a tax-advantaged basis.
Charles Darwin said: “It is not the strongest of the species that survive, not the most intelligent, but the one most responsive to change.”
Know where you stand so you can adapt and be responsive to change. Make plans for the rest of the year that will ensure continued growth—or at least survive for those struggling now—with maximum tax savings for all.
You’ll find more helpful resources for tax-planning included in these earlier blogs.