As we approach the end of another volatile year, it’s important for industrial automation businesses to prepare their year-end tax strategies in advance. Taxes can be challenging and complex even in a stable economy. Here are some important items to consider when preparing your taxes this year.
Section 179 Deductions
The Section 179 tax deduction gives taxpayers the opportunity to deduct the entire cost of automated machinery purchased or financed during the 2022 tax year as a business expense. Previously, only a fraction of the cost of such equipment could be claimed each year with depreciation. This recent change was enacted through the Tax Cuts and Jobs Act which has allowed more small to mid-sized companies to take advantage of upgrades that were inaccessible due to the upfront price. To elect this deduction will require completing Part 1 of IRS form 4562 and businesses will need to act fast to take advantage before the tax benefit expires at the end of 2022.
For anyone taking advantage of these deductions, it’s important to be aware that the machinery must also be activated and in use prior to midnight of December 31, 2022 for the purchase to qualify as a write off for 2022. The equipment must be used for business purposes more than 50% of the time to qualify for the deduction.
As 2022 ends, now is the time to accelerate the purchase of fixed assets to drive down taxable income. Q4 has arrived and now is the ideal time to perform an internal audit to ensure all applicable incentives are leveraged. Bonus depreciation is only offered for certain years, but thankfully it is being offered in 2022 along with the Section 179 tax deduction to provide some much-needed economic relief. However, when it comes to Section 179, there is a spending cap for equipment of $2,700,000 and a deduction limit of $1,080,000. Bonus depreciation applies towards used equipment and even other eligible equipment purchased in previous years dating back to September 27, 2017. The Bonus depreciation allocation goes down to 80% in 2023.
Businesses that adjusted their debt agreements during this turbulent economic environment should consider the potential impact of modifying debt as to whether or not they will be able to deduct their interest expense, especially given the tighter limits in 2022 under section 163[j] of the Internal Revenue Code. Generally, taxpayers can deduct their interest expenses accrued in a taxable year, but under the new Section 163[j] limitation the amount of deductible business interest expenses is not to exceed the sum total of the taxpayer’s business income, 30% of their adjusted taxable income, and their floor plan financing interest expense for the year.
Research and Development Credit Refunds
Congress passed the Inflation Reduction Act of 2022 which included provisions to double the R&D tax credit to $500,000, but only for tax years beginning after December 31, 2022. The Inflation Reduction Act also extended the Energy Efficient Commercial Building Tax Deductions through 2022 so companies will need to continue to audit their operations to leverage sustainable practices on their tax returns.
Back in 2017, Congress included a provision in The Tax Cuts and Jobs Act (TCJA) to require companies to capitalize and amortize R&D expenses over the course of five years beginning January 1, 2022. It has come into question whether this will remain the case as expectations grow that the application of this new rule will be delayed. If no change is made to the current law, businesses will need to prepare for the new requirements.
New IRS documentation requirements for R&D claims on amended returns put the onus on the taxpayer to identify all research activities and to name the specific individuals performing those activities as well as what information they seek to uncover. Taxpayers will also need to provide the combined total expenses of employee wages, supplies and contracts. Businesses intending to amend returns to claim R&D credits from previous years will need to quickly review their records to ensure they have all the required documentation to verify their credit.
Pass-Through Entity Tax Considerations
The pass-through entity (PTE) tax is an elective tax on partnerships, LLCs and S corporations to get around the federal $10,000 limit on deductions for individuals. New reporting requirements that went into effect at the beginning of 2022 will complicate partnership returns this year and will remain effective through January 1, 2026. Sixteen states have had this in effect as of 2021 with six more following suit in 2022 and seven more considering the move as well, but each has its own stipulations.
Schedules K-2 and K-3 require both partnerships and S corporations to report new international tax information. Businesses must now report the details related to international transactions, FTC limitations and information on Passive Foreign Investment Companies and Qualified Electing Funds. The PTE tax credit is considered paid or received on the last day of the PTE’s tax year.
Continue the Conversation
Whether the Congressional agenda will further address tax legislation by the end of this year may depend on the outcome of the November elections and many other factors that are hard to anticipate. Given just how many legislative changes are up in the air and how much it can vary by state, seeking professional CPA services is more important than ever. If you need help with year-end tax planning for your industrial automation business, please contact us today.