Act Now on Your Year-End Tax Strategy to Save in 2023

Act Now on Your Year-End Tax Strategy to Save in 2023



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A new Congress will meet in Washington, DC on January 3. This will set the stage for tax changes that could affect small and medium-sized companies. It’s important that businesses engage in certain tax-planning strategies so that they can take advantage of tax credits that are soon to expire or will be phased out. The Employee Retention Credit (ERC), is one such credit. Created in 2020 to provide economic relief during the Covid-19 pandemic, the ERC lets businesses claim thousands of dollars in refundable tax credits to compensate for losses experienced in 2020 and 2021 while they continued to pay employees. Businesses subject to a full or partial shutdown or significant decline in gross receipts can qualify.

Many small and midsize businesses I know are eligible for two quarters or more of credits, which can range as high as $7,000 per quarter per employee in 2020, with higher per-employee limits in 2021. The time frame to claim this credit is shrinking. Get started planning now.

Businesses have just three years from the time they filed their 2020 and 2021 quarterly tax returns to claim the credit. You can still claim the credit even if you have received funds from the Paycheck Security Program (PPP ), but you will need to gather all necessary documentation before you file the amended return.

Related article: How to Obtain the Employee Retention Tax Credit (ERTC) Under the Second Round of Covid Relief

Beware of companies advertising huge ERC payouts that are “too good to be true,” as the IRS noted in a special warning. The agency further cautioned that “improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest. “

Know where to look for someone who can assist you if you have a problem. A client signed a contract with a firm promising an ERC credit twice the amount we projected and lifetime audit protection. However, the firm was hesitant about how to handle prospective audits and didn’t list addresses or phone numbers. This is a red flag and a reminder to taxpayers that they should not be too greedy.

The importance of tax planning

How many business owners can honestly say their accountants are advising them on tax planning, like the ERC benefit, rather than merely doing their taxes? Is yours building a tax-strategy foundation that generates recurring savings year after year? Ask your accountant about their plans to save money year after year. Also, what strategies they use to do that. Don’t let your accountant tell you how to save taxes before the end of the year. You may be advised to purchase a vehicle for your company because you can write off the entire cost using bonus depreciation. This is not a good example of a forward-thinking tax strategy. And that particular deduction, by the way, will lose 20% of its value in each of the next four years, starting in 2023. It’ll be completely phased out by 2027.

Related article: How to Give Yourself a Tax Cut

Accountants should have a plethora of strategies to help small and midsize businesses and their owners save on taxes. For example, ask yours about research and development credits, or credits for hiring veterans and disabled individuals and members of other groups that the government has identified as facing employment barriers.

How to avoid an audit

It’s more important than ever to use only legal ways to limit your tax liability. Here’s a list of some dos and don’ts:

  • Don’t put your family vacation on your company’s books. If there is a business purpose for a partial business/family trip and that purpose constitutes more than 50% of the trip, document it and proportionally deduct your costs. Notes about the purpose of your trip, the itinerary, conference agendas, who you met, and other details should be included. The IRS has increased record-keeping requirements for travel deductions.
  • Keep original receipts, not just credit card statements. Many taxpayers assume that a credit card statement is a receipt. It is not. It will not deny your expense items as they appear on your credit card receipt.
  • Get in a habit of documenting all relevant expenses while you’re incurring them; and consider assigning an employee for that purpose or use technology. Because of the increased documentation requirements for business travel and meals, you will need to document the business reasons. If the IRS audits you after an event, you won’t be able to recall all of these details. You should deduct IRS-published travel per das by city if you don’t document actual expenses.
  • Don’t pay personal expenses through your company. For legitimate reasons, such as a salary, wage or distribution, write a check to the company. Then pay personal bills for your mortgage and electric bill out of your checkbook, not the company’s.

Related article: The IRS Hates Telling Entrepreneurs Anything About Taxes.

The messages are slowly sinking in. Four of my clients have already told me that they have completely restructured their internal processes in order to keep better records. Because they know it could be more risky in the future, they are taking the time to do it now.

While no one knows what tax changes are coming, there are already changes that business owners need to be aware of. These include benefits that could disappear. It’s not too late to act now.

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