Key Podcast Highlights
What Three Tax Moves Should You Complete Before the End of the Year?
- Buy capital assets now before the first of 2024. The amount you can deduct on assets in their first year is decreasing from 80% to 60%. This means you’ll want to buy capital equipment this year so you can deduct more of that cost.
- Consider a wash sale of individual stocks that are behind this year. A wash sale is where you sell your stock and take a capital loss. You can then offset against capital gains or take up to $3,000 of that loss against your ordinary income. Once you sell the stock, wait 30 days. Then you can buy the stock back. This is a good way to take advantage of losses and get a tax benefit from doing that.
- Max out your contributions to your 401k plans and any IRA plans that you have.
Transcript
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Gene (00:03):
Hey everybody, this is Gene Marks and welcome to another episode of the Hartford’s Small Biz Ahead podcast. Thank you so much for joining me. Some advice for you this week. We are in October already of 2023, which means that you really need to be thinking about your taxes. You still have a couple of months, two and a half months before the year ends, and the clock is ticking. My best clients, by the way, aren’t making tax moves this late in the year. I want you to know that, most people think about their taxes throughout the year, meet with their accountants throughout the year, make their tax moves based on strategy and based on what it is without there being a fire drill at the end of the year. But, okay, here we are. Taxes are still your biggest expense or at least one of them.
Gene (00:48):
I mean, what it’s like 20% of your income. So it’s a big deal. But we’re here in October. And you know, the good news is though, is that although I’m kind of wagging my finger at you, if you haven’t done anything with taxes over the year, you still have some time to make some moves. So let me offer to you three tax moves that you should be making for your business now before the year ends. Are you ready? Okay, number one, depreciation. Now, a lot of stipulations, a lot of rules from the 2017 Tax Act are going to be expiring, a lot of these benefits, deductions and credits, over the next couple of years. One of them that’s already starting to be phased out is bonus depreciation with the amount of depreciation you can take in the first year when you buy an asset, like a piece of equipment or furniture or fixtures or computer software or hardware.
Gene (01:40):
Well, up until this year, you could deduct a hundred percent of that cost, in the first year that you bought it. Now in 2023, you could only deduct 80% of that cost in the first year. The remainder has to be amortized over the life of the asset. The worst news is that in 2024, you’ll only be able to deduct 60% of the cost of a piece of equipment or asset, initially in the first year, and then amortize the rest over the remaining year, which means you’re getting much less of a first year deduction for equipment next year. Maybe you could be getting this year. So you need to be taking, making some moves about that. My advice to you is that if you are thinking of purchasing any type of capital, equipment, furniture shelving for your plant, forklifts, computer software, computer hardware, move those purchases up and buy them this year in 2023, why?
Gene (02:39):
Because you’ll be able to deduct more of that cost this year in the first year than you will be able to in 2024. So, tax advice number one, buy capital assets now before the end of the year. Tax advice number two, although the markets have held pretty good, they’ve been a bit volatile in 2023, you might have some stocks that have gained in value and some stocks that have decreased in value. Well, here’s my advice to you. If you’ve got any stocks that have decreased in value this year, consider a wash sale. A wash sale is where you sell your stock and take a loss, a capital loss of any loss that you’ve had, you can offset against capital gains or you can take it up to a $3,000 of that loss against your ordinary income. Well, once you sell the stock, wait 30 days after 30 days have passed, you can buy the stock back .
Gene (03:35):
It’s called a wash sale. It basically means that it’s to avoid selling your stock, taking the loss and then buying it back again. You gotta wait 30 days. But listen, what are the chances of your stock going up significantly in 30 days? Probably not that much. So it is a way to take advantage of losses and get a tax benefit from doing that and staying in the stock, going back and buying it again and holding onto it for a while. So consider a watch sale of individual stocks where you think that you’re really behind the eight ball this year, but you wanna keep the stock because you think the long-term prospects of the stock is good. Finally, my third bit of advice has to do with retirement plans. And yes, you should be maxing out the contributions to your own 401K plans as well as to any IRA plans that you have. However, I also want to reiterate that you really need to be maxing out your contributions to your Roth…
Gene (04:28):
Plans. You might have a Roth IRA, or now hopefully you’ve set up a Roth 401K in your business. You can contribute to that Roth for yourself and for your employees as well. That’s a new rule thanks to the Secure Act 2.0 which passed last year. What is a Roth account? A Roth account is where you take after tax money and invest it, but then it grows tax free and then you take it out tax free. You know when you put your money away in a 401k, that’s pre tax money, so it reduces your income and lowers your tax bill this year. But at some point you’re gonna be required to take that money outta your 401K, and when you do, you’re gonna have to pay taxes on it. Then you’re basically deferring the taxes with a Roth 401K or IRA.
Gene (05:15):
You’ve already paid the taxes so you can let your assets, your investments, anything in that Roth account grow for as long as you wanna leave it in there. And when you ultimately take it out, you won’t be paying any more taxes on it. So think about it. Say like you’re 40 years old right now and you put a thousand dollars into your Roth IRA or Roth 401K, say like 40 years from now, you wanna withdraw it and that a thousand dollars is worth $4,000. You won’t pay any taxes on that $3,000 gain. It just grows tax free. So my advice to you is to maximize your Roth contributions this year, as well as your regular 401K contributions this well this year. Okay, so let’s recap. Number one, buy assets. Now take as much first year depreciation as you can this year in 2023 because the amount that you can depreciate the first year is gonna go down in 2024.
Gene (06:06):
Number two, do some wash sales. If you have any stock that has lost value, sell it. Offset that loss against the capital gain or against your ordinary income. Wait 30 days and buy it back. That way you can stay in that stock for the long term. And finally, if you’re putting money away for retirement, of course, maximize your 401K contributions, but put as much as you can towards a Roth 401K or a Roth IRA, that way it’ll grow tax free over however long you want to keep that money in that account. They’re really, really awesome. So those are three tax moves that you can make, like right now to help reduce your tax bill not only this year, but in the years to come. And I hope this information helps. If you need any more advice or tips or help in running your business, please visit us at SmallBizAhead.com or SBA.TheHartford.com. My name is Gene Marks. Hope you enjoyed this week’s podcast episode. I’ll be back to you next week with some type of tip or advice, some kind of help to help you run your business that much better. Thanks for listening. We’ll see you then.
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What is the wash-sale rule?
When you sell an investment that has lost money in a taxable account, you can get a tax benefit. The wash-sale rule keeps investors from selling at a loss, buying the same (or “substantially identical”) investment back within a 61-day window, and claiming the tax benefit. It applies to most of the investments you could hold in a typical brokerage account or IRA, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and options.
More specifically, the wash-sale rule states that the tax loss will be disallowed if you buy the same security, a contract or option to buy the security, or a “substantially identical” security, within 30 days before or after the date you sold the loss-generating investment (it’s a 61-day window).
It’s important to note that you cannot get around the wash-sale rule by selling an investment at a loss in a taxable account, and then buying it back in a tax-advantaged account. Also, the IRS has stated it believes a stock sold by one spouse at a loss and purchased within the restricted time period by the other spouse is a wash sale. Check with your tax advisor regarding your personal situation.
How to avoid a wash sale
One way to avoid a wash sale on an individual stock, while still maintaining your exposure to the industry of the stock you sold at a loss, would be to consider substituting a mutual fund or an exchange-traded fund (ETF) that targets the same industry.
ETFs can be particularly helpful in avoiding the wash-sale rule when selling a stock at a loss. Unlike the ETFs that focus on broad-market indexes, like the S&P 500, some ETFs focus on a particular industry, sector, or other narrow group of stocks. These ETFs can provide a handy way to regain exposure to the industry or sector of a stock you sold, but they generally hold enough securities that they pass the test of being not substantially identical to any individual stock.
Swapping an ETF for another ETF, or a mutual fund for a mutual fund, or even an ETF for a mutual fund, can be a bit more tricky due to the substantially identical security rule. There are no clear guidelines on what constitutes a substantially identical security. The IRS determines if your transactions violate the wash-sale rule. If that does happen, you may end up paying more taxes for the year than you anticipated. So when in doubt, consult with a tax professional.
What is the wash-sale penalty?
If the IRS determines that your transaction was a wash sale, what happens?
You can’t use the loss on the sale to offset gains or reduce taxable income. But, your loss is added to the cost basis of the new investment. The holding period of the investment you sold is also added to the holding period of the new investment. In the long run, there may be an upside to a higher cost basis—you may be able to realize a bigger loss when you sell your new investment or, if it goes up and you sell, you may owe less on the gain. The longer holding period may help you qualify for the long-term capital gains tax rate rather than the higher short-term rate.
That can be the silver lining—but in the short term you won’t be able to use the loss to offset a realized gain or reduce your taxable income. Getting a letter from the IRS saying a loss is disallowed is never good so it’s best to err on the side of caution. If you’re concerned about buying a potential replacement investment, consider waiting until 30 days have passed since the sale date. Or work with a financial professional who should be able to confidently navigate the ins and outs of taxes and your investments.
For more information, see IRS publication 550Opens in a new window.