Taxes are among one of the biggest expenses that you’ll have to deal with as a small business owner. Fortunately, thanks to recent legislation changes, there are a number of tax-saving credits and deductions that can minimize the amount you owe. In this episode, Gene Marks and Mitch Gerstein, Senior Tax Advisor at Isdaner & Co., discuss several strategies to help you lower your 2023 business taxes.
Executive Summary
2:51—Under the new SECURE 2.0 Act, small business owners, as well as their employees, will receive substantial tax credits for maximizing their 401(k) plan contributions in 2023.
3:40—If your business has had a very profitable year, you should consider using a cash balance plan since it enables you to put away up to $265,000.
4:37—Those without retirement plans are strongly encouraged to consult with a tax advisor because the opportunity to defer income and take the tax deduction now is one of the few remaining legal tax shelters.
5:50—While Roth IRAs can prove beneficial for those who want to save money in the future, these retirement plans might not be the best fit for someone who wants to take advantage of those tax deductions right now.
7:47—Section 179 expensing is a form of accelerated depreciation which allows businesses to deduct up to $1,160,000 from their equipment costs, provided that they turned a profit. These deductions are indexed with inflation on a yearly basis.
8:25—Another form of accelerated depreciation is the bonus expense. While the 2018 Tax Cuts and Jobs Acts set the percentage limitation on bonus depreciation at 100%, it will begin to phase this bonus out at a rate of 20% starting this year; this sets the percentage limitation at 80% for 2023.
9:53—Cost segregation studies is the third area of accelerated depreciation and it enables you to segregate your other overhead costs and equipment expenses from your existing real estate costs, when calculating for depreciation.
13:56—Depending on your industry, the Inflation Reduction Act offers robust tax credits for any business expenses that promote energy efficiency.
15:53—Under the work opportunity tax credit, businesses can get up to $9,600 in credits for hiring individuals who are out of the military; out of prison; recently off of welfare; or if they’ve been long-term unemployed. However, these individuals need to be working for you for at least two years before you get credited.
17:44—If your business is working towards the improvement of a particular product or process, you may qualify for the research and development tax credit; just keep in mind that any applicable expenses have to be amortized over a period of five years.
19:34—Business owners who are planning to use the research and development tax credit need to apply for an extension due to recent developments regarding this legislation.
20:18—While many people are concerned that the $80 billion given to the IRS will result in more audits, this funding is necessary to create a more efficient system for better customer service.
22:34—Because of the restructuring occurring at the IRS, it’s best to submit your taxes and any outstanding notices online.
Links
Transcript
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Gene: Welcome to the Small Biz Ahead podcast. We interview great experts and offer advice and tips to help you run your business better. Hey everybody, it’s Gene Marks and welcome to another episode of The Hartford Small Biz Ahead podcast, thank you so much for joining us. We are talking taxes today, business taxes, for all of us that are running our businesses. I have got with me today Mitch Gerstein. Mitch, your tax director, correct, at Isdaner?
Mitch: Well, I’m a senior tax advisor.
Gene: Senior tax advisor.
Mitch: I joined the firm after taking an early retirement from a national firm.
Gene: Got you. So senior tax advisor at Isdaner & Co which is based outside of Philadelphia. It’s a regional firm, although accepts clients from all over the universe as well. Mitch and I have known each other for a number of years and have done presentations and events together. Plus, Mitch and his firm are my firm and my family’s tax advisors so I rely on Mitch for advice. Whenever I talk to him it’s like I’m getting some free… I don’t have to pay Mitch’s exorbitant hourly rate. I get all the-
Mitch: Not exorbitant.
Gene: Not exorbitant, okay. So Mitch, let’s talk. Our audience, as I told you before we started recording, is business owners, some independent and freelancers, but really in The Hartford Small Biz Ahead community, a lot of people that are running or working at employer-owned businesses. You’re talking to your clients now, we’re in 2023. I’ve got some specifics to rattle off. But before I get specific let’s get general. What tax advice are you giving your business clients for this year? What are some of the things that you’re telling them to be focusing on?
Mitch: Well, what we’re focused on is making sure that we can get a handle on 2022 because that’s really important to be able to gauge various tax strategies that will impact 2023. Generally speaking, retirement plans are one of the things that we like to talk about at the beginning of the year because it’s so much more difficult to… We could still do it at the end of the year but it adds a lot of value and gives us time to look at all the different options.
Gene: Let’s dig into retirement plans a little bit. And to the extent that you’re familiar because it’s relatively new legislation, the SECURE 2.0 legislation which just passed in December. And there are certain things that aren’t even going to take in effect for over the next couple of years. Give us some of your thoughts on retirement plans for a small business. What should we have? How should we be maximizing the money we’re putting away for retirement?
Mitch: Right. Everyone knows about the 401(k) plans for employees, even the owners can be taking advantage of that, and they should be maximizing those contributions for 2023. The contributions combined between the employee and the employer with certain types of retirement plans can be up to $66,000, plus if you’re over age 50 you can even put more money away. It’s really important to be able to, at the very least, make sure that you’re putting the money away as an employee which is $22,500 plus another $7,500 if you’re over age 50, and then the rest of it comes from a profit-sharing plan. If you’ve had a great year and you can look at other retirement plans like a cash balance plan. A cash balance plan can allow you to put away up to $265,000. It’s amazing how a lot of businesses they talk about it they just never take those steps. And then, like I said, at the year-end, sometimes you just run you out of time.
Gene: The SECURE 2.0 legislation that passed at the end of last year is actually going to provide a lot of incentives for businesses to put money away. There’s significant tax credits, right, for businesses to start up 401(k) plans?
Mitch: Right. There are 401(k) plan credits. I don’t think they’re as applicable for 2023 just yet, but that’s why I sort of didn’t really cover that piece of it.
Gene: No, that’s okay.
Mitch: The most important thing is if you don’t have a retirement plan this is the time to do it. This is the time just to start talking with your tax advisor, start talking with your financial advisors, and to start seeing what type of retirement plan would work best for you. The opportunity to defer the income and take the tax deduction now is one of the few remaining legal tax shelters.
Gene: I agree. I have a SEPP, A single employer pension plan, we get from your firm. You basically tell us, based on the limitations of the income of my business or my income, what we could put away into that plan. And we have it set it up with a separate investment firm.
Mitch: That’s correct.
Gene: I don’t have a Roth plan, any Roth like a Roth IRA or a Roth 401(k) or anything like that. Just for all of you guys watching and listening, my company, a very, very small business but would still have some eligibility for a Roth plan I believe. What are your thoughts on that?
Mitch: Roth is non-deductible. I just had this conversation with a client yesterday and we walked through the different options. I am a believer, again, it’s really an individual decision, and really some of it’s tax but some of it’s financial over the future. As you know with a Roth, the money that goes in there is not tax-deductible. You hold it for five years and later on in life when you pull the money out whatever it grows to, the appreciation is tax-free. You don’t have to pull it out you can let it run for multiple generations. And just personally, I’m not as much of a fan of Roth because I like those tax deductions. There aren’t many tax deductions that actually will pay for the amount that you wind up giving your employees, right?
Gene: Right.
Mitch: But again, Roth has some benefits that are in the future, not currently.
Gene: Great advice. You and I can have a debate later on. The other reason why I was thinking about Roth also is that markets are down. Theoretically, markets tend to turn around. In a down market, time to put money into a Roth even if it’s after tax. Ultimately it’s going to go up, it’ll grow tax-free. Again, if you’re a business owner, even an individual, a Roth is something you should be talking to your tax advisor about because it might be even more beneficial now.
Mitch: Right. Again, everyone comes from it from a different perspective and tax isn’t the only driver.
Gene: Good, good, good, good. Okay. Let’s talk about some other things I think business owners should know about this year. Give us your thoughts on accelerated depreciation.
Mitch: I have a lot of thoughts on that.
Gene: Some of them even good.
Mitch: Yes, yes. Accelerated depreciation there are I would say three areas that I would include in that. There’s something called Section 179 expensing which has been around for many, many, many years. When you acquire equipment, to be able to deduct for 2023 $1,160,000. There’s certain rules. You have to be profitable. And every year it’s indexed with inflation and so there’s Section 179. What’s really had been very advantageous is what’s called bonus expense. Bonus expense has no dollar limitation, it’s a percentage limitation. And up until the end of 2022, the percentage limitation was 100%. So 100% of used and new equipment purchases, whether it created a loss or not, there were no limitations. The increases to 100% came from the Tax Cuts and Jobs Act which became law in 2018.
Mitch: However, beginning in 2023, that percentage of 100% for the next… Until it expires ratchet is down by 20%. So in 2023, it’s down to 80% and so on and so forth. You have to look at both now. A million dollars is a million dollars, right, so it didn’t really matter other than if you were profitable or not. That’s probably one of the biggest limitations. But now you may wind up getting more if you take Section 179 because each year thereafter 80, 60, 40, 20, zero. As we know that could change with tax… With Congress over time. Those are two areas.
Mitch: But the third one is cost segregation studies. So cost segregation studies is taking a real estate that you may have bought years ago… Commercial real estate is 39 years and that’s a really long time to write off your building. But with a cost segregation study, it allows you to look at the components like plumbing, and electrical, and other items that don’t really have that useful life that you can segregate from the real estate costs. Recalculate those depreciation. Take in consideration bonus, five years, seven years as well. You recalculate from the time that you placed it in the service and you get to take that entire catch-up deduction in the current year that you do the study.
Gene: Wow. So let me make sure I’m keeping clear on some of the takeaways here because this is great stuff.
Mitch: Making notes for yourself, right, Gene?
Gene: I am. I don’t even have capital equipment but I have clients I can talk to about this and tell them… And push them over to you. If you do have a building or a property, some people think that oh, well I have a property so the rules say I have to depreciate that over 39 1/2 years when really you could be segregating out some, like you said, the plumbing, electrical, other things that are parts of that building. You might be able to not only depreciate them quicker but you can have a catch-up and depreciate all that right away. So that’s huge. And I think a lot of business owners might not realize that and they’re missing out on those big deductions.
Mitch: Yes.
Gene: When it comes to depreciation, there’s the Section 179 deduction or there’s bonus depreciation. I guess the takeaway there is you want to talk to your accountant to see which makes the most sense for you this year because there are limitations to both. And, of course, the Section 179 is now starting to be limited.
Mitch: Bonus. The bonus is being limited.
Gene: Bonus. The bonus is being limited, excuse me-
Mitch: That’s okay.
Gene: Each year until it expires. That’s a conversation you should have with your accountant.
Mitch: Right.
Gene: And then actually going back to what we were talking about previously, retirement plans as well. Roth is important that we should be looking into as well as making sure that we’re maximizing out on our individual 401(k)s both from an employee and employer standpoint.
Mitch: Right. I just want to add. The cost segregation study, they actually… It’s been around for a long time. There’s a general results, it’s not applicable to every situation. But 20 to 40% of the costs could qualify to be recalculated and have a accelerated write-off instead of 39 years.
Gene: The cost segregation is that a new thing or is that part of the-
Mitch: No, it’s been around for a while. It was a tax court case of a hospital who has to… In order for a hospital to run they require certain electrical systems. As long as you have this study it’s been… IRS has essentially blessed it. And, of course, it’s like anything else, there’s a cost-benefit that you have to do the analysis. I mean, if you’re going to be selling the building in two years, ideally that probably isn’t going to make sense. The present value of being able to accelerate that depreciation in one year, especially if you had the building for 10 years. I’m all about tax deductions.
Gene: I’m assuming that’s got to be a talking point for you when you’re going out to clients this year, you’re bringing that up. I can think of one client in particular that you and I share that I think would be-
Mitch: We’ve already talked to him about that.
Gene: Very interested in that.
Mitch: Right. We used to ask for the general ledger, now we ask for the general ledger and their fixed asset schedule.
Gene: That’s fascinating. Okay, great. All right. Next topic when it comes to employer or tax from a business standpoint. The Inflation Reduction Act, Mitch, right, without drilling down into the weeds, is there… What’s in the Inflation Reduction Act big picture things that come to your mind that impact a business owner that they should be asking their accountants about?
Mitch: It’s very specific, right, it’s very industry-driven. More robust tax credits for energy credits. And for electric vehicle tax credits are now much more in favor. If you’re a builder in commercial buildings, there’s tax credits for energy efficiency. There are many of those types of credits that were in the Inflation Reduction Act. $437 billion of new spending and tax breaks. For most businesses that we’re finding so far, those tax credits are not as prevalent.
Gene: Interesting.
Mitch: If you’re in the right industry.
Gene: It could be. And these are what types of industries? Environmentally green industries, people developing-
Mitch: Builders, right, because they’re the ones that… Solar and wind energy. Fossil fuel, power plants, and things of that nature.
Gene: Okay. A couple of tax credits I want to ask you about as well just to make our audience aware of them, okay? One is the work opportunity tax credit. It doesn’t expire until 2025. It is a tax credit that could be as high as $9,600-
Mitch: Correct.
Gene: For an employee, if you hire somebody, I think, if they’re out of the military, if they’re out of prison, if they’re off of welfare, if they’re long-term unemployed.
Mitch: Long-term unemployment.
Gene: Give us your thoughts on that. I mean, I feel like not enough business owners even know about the existence of this tax credit which could be a big benefit. What are your thoughts on it?
Mitch: Right. A lot of those categories and then there’s 10 different groups that are targeted. It’s also employees who tend not to stay in the company. So that’s one of the reasons why it sound… Excuse me. It sounds great, but you have to… There’s a two-year period from the time they get hired. For example, a nursing home sounds great, they have all these employees that… Because it takes some time to get credited and you… And, obviously, there are costs for doing that. In the right situation for the right workforce, it is real beneficial. And I’ve been practicing for a long time, and there aren’t that many clients that I’ve seen over the years that are good candidates. And there’s a lot of administration that goes into it.
Gene: Interesting. Okay. Speaking of administration, another tax credit that takes a lot of work to do. And I know that it’s a specialized one is the research and development tax credit, the R&D tax credit. Again, that mutual client that I mentioned earlier that we have, they take advantage of the R&D tax credit and they’re a manufacturer. I do feel that a lot of businesses are not aware of the fact that if they are doing… The definition of R&D is fairly general enough that they might be eligible for it. But then like the Work Opportunity Tax Credit, there’s a lot of work and resources needed to claim it to see if it’s even worth it. What are your thoughts on the R&D tax credit?
Mitch: The tax cut and jobs act that again, came into law in 2018, it had to pay for some of the deductions that came about it. And one of the things, which was a time bomb which has now hit, which I actually spoke to the client about, the mutual client about today, is that the research and development costs itself were normally just trade a business expenses so you just deducted those expenses. And then if you qualified for a study you got this credit on addition to that. Well, beginning in 2022, those expenses now have to be amortized over five years. It’s a half year the first year so it’s a million dollars of expenses to get $100,000 tax credit. You now have to add back to your income $900,000. Nobody was talking about this until they saw… They thought that at the end of the year Congress, in the last legislation, was going to resolve that and defer it. If you Google R&D expenses, it’s unbelievable the amount of information.
Mitch: The AICPA, our regulatory body, just sent a letter last week to Congress and pleading with them because… It sounds great. You brought it up, right? It sounds great this R&D tax credit, but now though… It doesn’t even matter if you didn’t take the credit, those expenses are now amortizable. Just like software costs that you develop, you can no longer expense them. So anyway, I know that’s not the direction you were going with that.
Gene: No, but it’s fascinating.
Mitch: I’m just letting those clients and businesses who are listening in today know that there is… A final note about that is, you want to file an extension because you want it… Because everything I’m hearing, it’s going to get fixed. It’s no guarantee but it’s going to get fixed. The next thing you want to do is start amending returns regarding this issue. You may have to pay more but you amend. And hopefully, by the summer, they’ll find a tax bill that will resolve this and kick it down the road.
Gene: Just to make sure I’m clear because I’m a little fuzzy. You want to file an extension if you have used the R&D tax credit before or plan to use it, or if you have R&D expenses in general?
Mitch: R&D expenses.
Gene: Right.
Mitch: Correct.
Gene: Because those R&D expenses are now… which is a huge impact on so many companies right now that perform these kinds of work. Okay. So whether or not you’re applying for the R&D tax credit, if you have R&D expenses this impacts you.
Mitch: Yes.
Gene: I’m going to have to write about that. Okay.
Mitch: We could talk about that.
Gene: That’s a-
Mitch: It’s not good for business that’s for sure.
Gene: No, it is not, that is not. Okay. One final question and I’ll let you go. Tell me about your… The IRS this year. I mean, they got 80 billion in funding. People screaming and yelling like “Oh my God, we’re going to have tax auditors now, everybody’s going to be audited and whatever” which is crazy because I know that they’re going to be hiring more people but a lot of people are going to be retiring. A lot of the money’s going into making better and more efficient systems. Hopefully better customer service which has really been lacking. Tell our viewers and our listeners, what are your thoughts on all this new funding for the IRS and how this will ultimately impact them in your opinion?
Mitch: Right. The audit process has been nonexistent for many, many years, right? In order for everyone to pay their fair share of tax there is a benefit. It may not be you or I or any of the businesses that are listening in today who are ones that are getting audited, but I think that’s really important to be able to make sure that the rules are being complied with. The biggest thing I can see as a takeaway is from just talking to my colleagues and that is, it’s been so difficult to be able to resolve any tax notice at all, period, right? Lost checks. We’re finding that we’re able to get through a little better now.
Mitch: Well, obviously, we’re heading into a tax season so it will take some time for that, but their systems seem to be working better, I’m hearing some positive experiences. And the time that it takes to get a matter resolved is getting shorter. But I would still be cautious. I wouldn’t send any checks, I’d pay them online. Take advantage of accessing the information on your business account and your individual account online. I recently heard that they’re now going to even allow you to submit online some of your responses to some notices. They’re slowly but surely coming into a modern computer system which they… As you know, the joke is it hasn’t been that way for decades.
Gene: Everyone, I’ve been speaking with Mitch Gerstein. Mitch is the most very prolific senior tax advisor at Isdaner & Company, a regional accounting firm outside of Philadelphia. Mitch, what is Isdaner’s website address?
Mitch: It is www.isdanerllc.com. I-S-D-A-N-E-Rllc.com.
Gene: Very good. Thank you so much for joining me, we’ll definitely be talking to you again in the future. Lots more business tax issues that we haven’t even touched on this time but we’ll get to get to them at some other point in time. Thanks, Mitch, it was great speaking with you.
Mitch: Thanks for having me.
Gene: Everybody, you have been watching and listening to The Hartford Small Biz Ahead podcast, my name is Gene Marks. Thank you so much for spending time. If you need any advice or help or tips for running your business please visit us at smallbizahead.com or SBA.thehartford.com. Again, my name is Gene Marks. Thanks again for listening and watching, we will see you again next time. Take care. Thanks so much for joining us on this week’s episode of The Hartford Small Biz Ahead podcast. If you like what you hear please give us a shout-out on your favorite podcast platform. Your ratings, reviews, and your comments really help us formulate our topics and help us grow this podcast so thank you so much. My name is Gene Marks, it’s been great spending time with you, we’ll see you again soon.
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