It’s tax time, which means companies nationwide are getting ready to file their tax returns. As you prepare to meet with your accountant, here are some details to keep in mind.
Legislative Measures with Impact
The Inflation Reduction Act, passed in August 2022, includes several provisions that will impact companies now and in the near future.
- A 1% excise tax will be assessed on corporate buybacks; these apply to repurchases that public U.S. companies make after Dec. 31, 2022; some affiliates of U.S. corporations may be affected as well.
- A 15% alternative minimum tax will be assessed on the adjusted financial statement income (AFSI) of some large corporations; it is also called "business minimum tax" or "book minimum tax," and it took effect after Dec. 31, 2022. Companies that could have to pay the tax in 2023 must estimate their AFSI for 2022, 2021, and 2020.
- The section 462(l) excess business losses limitation rules that apply to non-corporate taxpayers, which were to expire after 2028, have been extended by two years.
- Many energy-related tax credits have been introduced or modified. For example, the IRA provides new opportunities for monetizing climate change and green energy tax credits. Also, the Creating Helpful Incentives to Produce Semiconductors Act, from August 2022, offers a 25% advanced investment credit for semiconductor manufacturing.
Claiming Tax Credits
The U.S. government provides many tax credits beyond the new energy-related ones. They apply to projects in low-income communities, innovation and technology, and various other industries. What follows are some examples:
- The R&D credit applies to start-ups that incur specific research and development expenses.
- Under the New Markets Tax Credit Program, companies can use federally funded credits for qualifying investments in low-income areas.
- Some employers can receive tax credits through the Federal Empowerment Zone Credit, the Work Opportunity Tax Credit, and the Indian Employment Credit, as well as credits related to the Family and Medical Leave Act.
- Some taxpayers can delay their federal tax on capital gains if they reinvest those capital gains in Qualified Opportunity Zones. However, the investment must be made within a specific time period.
Tax Accounting that Increases Savings
With rising interest rates, many companies want to safeguard their cash reserves. One way to accomplish that is to use varying accounting methods to defer their tax liability. This approach will likely not change the amount of income to be reported, but it can delay recognizing that income to a later year or schedule deductions for an earlier year. Companies can benefit from talking to their accountants about those options.
Other Strategies to Consider
Write-Offs: Many businesses are still recovering from the effects of the COVID-19 pandemic while also weathering inflation. Those with worthless assets should consider claiming those losses on their tax returns. Examples include bad debts, which can be written off entirely or partially, and damaged or abandoned property. Companies should also look at insolvent subsidiary investments (if they are 80% owned or part of a partnership) and consider claiming those as losses.
Operating Losses: Net operating losses can decrease taxes owed in profitable years, making them valuable assets. Businesses should check with their accountants about the percentages allowed based on the tax year.
Capital Gains: Companies should consider future and current taxes when they do capital gains tax planning. But they should also consider possible deferral periods, how to use alternative funds, and what their current cash needs are.
As you close out 2022, talk to your accountant about your options for this year, but also discuss planning for 2023 and the years ahead. By adopting sound practices now and taking advantage of new tax credits, you may be able to lower your tax obligations in the future.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.