With the year-end quickly approaching it’s a great time for Denver businesses to review their financial and tax situation. This should include an evaluation of current factors to determine how to optimize the tax situation to reduce overall liabilities. For most, it is nearly impossible to keep pace with the ever-changing tax updates and changes. For this reason, it is important to consult with a tax advisor who can identify the most beneficial steps to take. To help clients, prospects, and others, WhippleWood CPAs have provided a summary of the key tax planning considerations to make at year-end.
Employee Retention Credit (ERC) Claims
The IRS has suspended processing of employee retention claims until January 1, 2024. This extends a bottleneck for businesses receiving the refunds to which they are entitled. In addition, it can put taxpayers in a difficult position for their 2020 taxes. The IRS guidance provides that taxpayers must increase their taxable income for the employee retention credit in the period to which the credit relates. If a business filed its 2020 income tax return without extending the return, the statute of limitations on that return ends on March 15, 2024. If the business has not yet received its 2020 ERC refund, we recommend filing a protective claim for a refund for the 2020 income tax return. Otherwise, if the IRS ultimately rejects the ERC refund claim, the business is at risk of being taxed on a refund that it never received. If your business is in this situation, contact us so that we can help you through this difficulty.
GAAP Accounting Changes
If your business issues financial statements in accordance with generally accepted accounting principles (“GAAP”), there are numerous changes to consider. Those changes include revenue recognition and accounting for leases. These changes could have a material impact on your financial statements. Many businesses have had issues with their loan covenants because of these changes. If you would like to discuss these changes on their potential impact on your business, please call Ron Bass at 303-551-8009.
Colorado FAMLI Requirement
All Colorado businesses must begin withholding premiums for the new Colorado FAMLI leave plan on January 1. Businesses with at least ten employees also need to pay the employer premium. In addition, employers are required to notify their employees about the program by January 1, 2023. The employee and employer premiums are each 0.45% of gross wages with certain deductions allowed. Although both employers and employees pay the premiums for all of 2023, coverage under the plan doesn’t actually begin until 2024.
Bonus depreciation began phasing out in 2023. If your business has plans to purchase software or equipment, it might make sense to purchase the assets before year-end. For example, if a business purchases a piece of equipment for $20,000 on December 31, that business can take bonus depreciation of $16,000 on the asset against 2023 taxable income. However, if they delay the purchase until January 2, they would receive a $12,000 deduction in 2024 with the remainder of the depreciation spread over future years. Bonus depreciation is further reduced in later years. In addition, we often work with clients to maximize the tax rate that applies to the depreciation deductions by making elections to choose which years the business receives the depreciation. If the owners’ tax rates change from year to year, it often makes sense to time the deductions to be in years when the taxpayer is paying a higher tax rate. We can work with you to maximize the value of the tax deductions for the purchases of buildings and equipment.
Elections for State Taxes
Most states (including Colorado) now allow a partnership or S corporation to elect to pay the state tax on behalf of its owners. The advantage is that the taxes imposed at the business level are not subject to the $10,000 federal cap on deducting tax payments. There are often drawbacks to making the election that might make it more advantageous to forego the election. If you operate a business in a partnership or S corporation, discuss which election you should make for your situation.
Filing Sales and Income Taxes in Multiple States
There have been rapid changes in the requirements to file and pay taxes in states other than your main place of business. If you have sales to other states, employees in other states, or inventory (such as in an Amazon warehouse) in other states, you may be required to pay income and/or sales and use taxes in those states. Even having independent contractors in other states can sometimes create filing requirements. If you are required to file a return and don’t, the statute of limitations never ends on those taxes. Instead, penalties and interest continually accrue until you pay the tax. For sales taxes, you can also change the tax from being a tax on your customer to a tax on your business. If you may be taxable in other states, you should work with your tax preparer to determine which taxes you should file.
Colorado Delivery Fee in Sales Tax
Colorado now has a delivery fee that is included in the sales tax filings. For each delivery of an item subject to sales tax within Colorado by motor vehicle, the seller is required to collect $0.28 (increased from $0.27) from the customer and remit it with the sales tax. There is now an exemption from the fee if your business has $500,000 or less of retail sales in the prior year. If your business delivers taxable merchandise by motor vehicle (including by mail or other common carrier) and you are not exempt based on your revenue, you should be collecting and remitting this fee.
Employee Retirement Plans
Colorado has a new requirement that businesses with at least five employees offer retirement plans for their employees. There are multiple options for meeting this requirement and depending on the circumstances, the compliance costs can vary greatly between the options. If the business does not adopt its own plan, it is required to adopt the plan offered by the State of Colorado. That plan offers much less flexibility than the business’s own plan and that lack of flexibility can be costly. For example, in the state plan, an employee must be enrolled once they’ve been employed for 180 days. In your own plan, you can set eligibility for up to a year. With employers who have high turnover, this difference can substantially change the administrative costs.
Potential Gain Exclusion on the Sale of Your Business
There has been a great deal of activity in the last couple of years with business owners restructuring their business to qualify for what is called a “1202 Gain Exclusion.” If the business is held in a C corporation for at least five years, then the owner can sell the stock and exclude up to the greater of ten times the initial investment in the C Corporation or $10 million in gain. If you are working toward selling your business for a substantial gain at least five years down the road, we may be able to help you restructure your business so that you qualify for this tax benefit.
1031 Exchanges for Real Estate
1031 exchanges allow you to defer the taxes on selling real estate that is held for investment or business use and has long been a popular way to reduce taxes. Delaware Statutory Trusts (DSTs) have become a very popular vehicle for 1031 exchanges in the last couple of years. DSTs allow you to trade your real estate into a passive real estate investment that doesn’t require any of your time to manage. They are also handy as a backup when you need to identify the replacement real estate after the sale of your property. That way, if the deal for your replacement property falls through, you can still defer the gain. If you are interested in using a DST to defer gain on a real estate sale, call us and we can help you through the process.
There are several year-end tax-saving opportunities that companies can leverage to reduce taxes due. While the bottom-line impact will vary based on individual situations, now is the time to take action. If you have questions about the information outlined above or need assistance with a tax or accounting issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.