Before you leave 2023 in your rearview mirror, you likely want to ensure your finances are in a good place, so you're prepared for tax season.
To help ease the pain of tax season, we asked Laura Jenkins, tax partner with Citrin Cooperman, about a few things business owners should keep in mind when filing this year.
What is the latest update on the tax treatment of research and development expenses?
For tax years beginning on or after January 1, 2022, businesses that incur research and development (R&D) expenses are required to capitalize these expenses and amortize them over five years (15 years if the expenses were incurred in a foreign country).
Prior to this, R&D expenses could be fully deducted when incurred. There has been a lot of activity in Congress to repeal this new capitalization law and revert to the previous expense treatment, but at this time, no bill has been successfully passed.
Businesses should plan to capitalize and amortize all R&D expenses. If you have been engaging with a firm to assist you with quantifying your R&D tax credit, they will be able to assist you with quantifying the amounts that you’ll need to capitalize as well.
What are the latest Employee Retention Credit updates?
The Employee Retention Credit (ERC) was created to provide financial relief to businesses and tax-exempt organizations during the COVID-19 pandemic. The credit was a true lifeline for businesses, helping them offset labor costs and promote employee retention. Though a one-time credit, businesses can apply for the ERC through 2024 to reflect any relevant claims between 2020-2021.
There are huge benefits to filing for the ERC. If your eligible business suffered financially at the onset of the COVID-19 pandemic, this credit could provide up to $26,000 per employee for 2020 and 2021.
It may take some time before your claim is processed, however, because the Internal Revenue Service (IRS) won't process new ERC claims due to a rising number of small business scams and fraud cases. Business owners should beware of scams or aggressive positions when selecting a firm to work with for their ERC study.
The IRS is still processing the backlog of previously filed ERC claims, so hang tight — if you haven’t received an update yet, you’re in the pipeline!
Does my business structure impact my taxes?
You’re responsible for certain corporate tax requirements, regardless of business structure. Excise tax, or taxes on a particular product or service, like tobacco or oil, and income taxes apply to all businesses regardless of structure. However, if you operate a sole proprietorship, all your business income will be filed under your personal federal income.
If your business entity is structured as a partnership or S corporation, you’ll want to ensure you’ve considered electing to pay pass-through entity (PTE) taxes, as there are tax savings available. These entities can elect to pay state taxes on behalf of the owners, which enables the state tax payments to be deducted from federal taxable income. If the owners pay their state taxes individually, they can only deduct up to $10,000 for state taxes, including real estate taxes that have already been paid.
To ensure your taxes are done correctly, communicate your business structure and legal obligations to your tax professional.
What do I need to know if I want to hire someone who works out of state?
Remote work enabled many organizations to hire top talent without the restrictions of physical location. But this also meant that employers needed to increase their knowledge of state regulations that may impact taxes. Generally, having employees working out of state will create additional income tax filing obligations for your company and can also create new state sales tax filing obligations as well.
Laura advised speaking with your team of advisors to ensure you are informed on state regulations, especially if you’re considering hiring anyone out of state.
Have qualified business income deductions changed?
The Tax Cuts and Jobs Act that was passed in 2017 introduced a 20% deduction on all business income that was not a specified service. This deduction is slated to sunset after 2025. For the latest information, check the IRS’ website.
Citrin Cooperman’s tax professionals can help you work through these increasingly complex tax strategies and achieve your business goals. For more information, contact Laura Jenkins at ljenkins@citrincooperman.com.
"Citrin Cooperman" is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. The entities of Citrin Cooperman & Company, LLP and Citrin Cooperman Advisors LLC are independent member firms of the Moore North America, Inc. (MNA) Association, which is itself a regional member of Moore Global Network Limited (MGNL). All the firms associated with MNA are independently owned and managed entities. Their membership in, or association with, MNA should not be construed as constituting or implying any partnership between them.
