While 2023 was not a year of significant tax reform, there are several Internal Revenue Code provisions which are set to kick in, or recently have kicked in already which may impact your business over the next few years. Below, we have outlined some of the more significant topics which business owners should consider and discuss with their advisors while performing their tax planning.

Bonus depreciation

Perhaps the most impactful change in the tax law for 2023 is the commencement of the phase-out of bonus depreciation. The Tax Cuts and Jobs Act (TCJA) extended 100% bonus depreciation for personal property and created a new class of property, qualified improvement property (QIP), eligible for this accelerated depreciation. However, per the TCJA, bonus depreciation (for all property classes) begins to sunset in 2023 with a reduced rate of 80%. Without legislative action, the rate will continue to decrease by 20% each year until 2027 when it will expire. There are several courses of action business owners can engage in to be able to accelerate deductions despite the phasing out of bonus depreciation.

First, businesses should analyze all capital improvements for deductibility as repairs under the tangible property capitalization regulations. These rules allow for, at times, very taxpayer friendly deductions of improvements that under prior regulations would have needed to be capitalized and depreciated. Additionally, if these costs cannot be deducted as a repair, they should be analyzed under section 179 as a method to take a more immediate deduction.

To maximize the benefits of bonus depreciation, business owners required to capitalize costs should aim to accelerate the timeline for completing improvements, ideally concluding them by year-end. This strategic timing allows businesses to leverage higher bonus depreciation rates sooner. Lastly, even when bonus depreciation rates are lower, cost segregation studies are a good way to support the classification of certain costs relating to capital improvement projects as property with a shorter class life (i.e., five or seven years).

Research and development (R&D)

Starting with tax years beginning after December 31, 2021, Section 174 requires the capitalization and amortization of all research expenditures over five years for domestic and 15 years for foreign research, affecting the treatment of software development costs as well. The amortization period begins with the mid-point of the taxable year in which the expenditures are paid or incurred.

This shift to mandatory amortization is considered a change in accounting method. To comply, taxpayers could initially adopt this method by including a statement with their 2022 tax returns. However, if this initial step was missed, filing Form 3115 for a change in accounting method becomes necessary to align with section 174’s requirements.

The Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) proposes retroactive relief for these new rules. As of this writing, the bill was passed by the House of Representatives, but still faces an uncertain future in the Senate. We will keep you informed of any changes.

Secure Act

The SECURE 2.0 Act was signed into law on December 29, 2022, providing numerous new retirement-related provisions which build on the original SECURE Act of 2019. The 2019 SECURE Act, altered the rules around how you can save and withdraw money from your retirement accounts. SECURE 2.0 addresses additional issues related to retirement and savings that were not part of the original SECURE Act and creates some new flexibility and accessibility to help individuals plan for a more secure future.

Some of the key changes that went into effect in 2023 were:

• The threshold age when individuals must begin taking from traditional IRAs and workplace retirement plans increased from 72 to 73, meaning that individuals now can choose to delay taking their first RMD until April 1 of the year following the year in which they reach age 73.
• Individuals can choose to have employer matching contributions directed to their after-tax Roth 401(k) or other workplace accounts. These contributions will be considered taxable income in the year of the contribution.
• Employers will be allowed to create Roth accounts, open to after-tax contributions, for SIMPLE IRA and SEP retirement plans. Under previous law, these plans only allowed for pre-tax contributions.
• The penalty (excise tax) for failing to take RMDs on a timely basis is cut in half effective in 2023, from 50% of the undistributed amount to 25%. If the failure to take the RMD has been corrected in a timely manner (corrected within 2 years), the excise tax is reduced to 10%.

Additionally, the following changes are set to go into effect for 2024:

• Employees will not be required to take RMDs from Employer 401(k)s when they turn 73, this change is aimed to match the ROTH IRA rules.
• All catch-up contributions by plan participants must be on an after-tax basis (designated ROTH contributions), except for individuals who earn $145,000 or less (this figure will be indexed for inflation).
• Catch-up contributions to Traditional IRAs, currently limited to $1,000 per year, will be adjusted for inflation in increments of $100.
• A new provision will allow employers to make contributions to workplace savings plans on behalf of employees who are still repaying student loans. Under the new law, employers would be allowed to make contributions on behalf of employees even if those employees do not make retirement plan contributions. Employer retirement plan contributions can match the amounts of student loan debt repaid by the individual worker in a given year.
• The maximum qualified charitable distribution (QCD) amount will now increase based on the inflation rate. QCDs cannot be made directly from an active employer sponsored plan.
• 529 account holders will be permitted to roll the money into a Roth IRA, since both Roth IRAs and 529s are post-tax accounts. The rollovers have some limit such as beneficiaries can roll over a maximum of $35,000 during their lifetime, and normal Roth IRA annual contribution limits apply, set at $6,500 for 2023; the account must have been open for 15 years to be eligible for such a rollover; and specific contribution and earnings amounts must be at least five years old before being rolled over.

Interest Expense Limitation under Section163(j)

Another TCJA provision, the 163(j) interest limitation, has been around for a while now, however, beginning in 2022 the law became more restrictive. The limitation is calculated as 30% of a taxpayer’s taxable income (as modified by the statute). Prior to 2022, depreciation and amortization were added back to this calculation, however that is no longer the case, meaning that taxpayers subject to the 163(j) limitation could face further obstacles in deducting their current year interest expense. With the more restrictive limitation, careful analysis should be performed to determine whether a business qualifies for certain exception or exclusion provisions (i.e. small business exception, real estate trade or business election) to 163(j). In addition, companies should consult their advisers to ensure certain interest-like charges are not being inadvertently subject to limitation under these rules.

PTET

For 2023, at least 36 states have now enacted pass-through entity tax (PTET) regimes. The ability to deduct state and local taxes despite the TCJA limit to a $10,000 itemized deduction has become more and more popular as a benefit offered by states to business owners who live or do business there. This is evidenced by the enormous expansion of PTET regimes, now covering most of the country. However, it is important for thoughtful analysis to be performed each year where an election can be made. While generally beneficial, PTET elections can, under certain circumstances, be detrimental or provide minimal benefit to taxpayers.

The state and local tax deduction cap is currently set to expire at the end of 2025 as part of the TCJA. Many states have pegged their PTET regimes to expire at that time.

TCJA Expiring Provisions

The TCJA bifurcated its tax provisions into two main categories. Those which it categorized as “Business” provisions and are permanent (i.e. 163(j), corporate tax rate) and those which it considered “Personal” that are mostly set to expire at the end of 2025 and need to be considered with any tax planning going forward.

Some of the more relevant provisions set to expire and revert back to pre-TCJA law are:

• Current individual income tax rates
• SALT deduction cap
• 199A deduction for qualified business income
• Mortgage interest limitation
• Estate and Gift Tax lifetime exclusion
• Excess business losses (has been extended through 2028 already)

As always, Citrin Cooperman is here to advise business owners on the best course of action and proper analysis to perform to make sure that all aspects of the tax law are maximized to their benefit. Please reach out to your Citrin Cooperman advisor with any questions on upcoming changes to the tax law.