Year-End Tax Strategies for Businesses

Every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of its adjusted taxable income (ATI). The interest expense limitation is applied at the partnership level but flows through to the partners and reduces the partner’s outside basis in their partnership interest. The interest expense limitation is applicable at the C and S corporation levels, remaining at the entity level until excess taxable income can be generated to utilize interest previously disallowed.

A taxpayer may reduce the amount of disallowed interest by increasing the amount of capitalized interest, which is not subject to disallowance. Several provisions under the code, including sections 263(a), 263A, and 266, require or allow taxpayers to capitalize interest to inventory or property. Please work with your tax advisor for future planning.

Exemptions from the limitation on business interest deductions:

NOTE: If a taxpayer can meet the small business gross receipts test, other advantages include not being required to follow UNICAP, being allowed to utilize a simplified method to track inventory, and not being required to utilize the percentage for completion method for long-term contracts.

For property placed in service during 2024, the bonus depreciation percentage has decreased from 100% (in 2022) to 60%. The depreciation percentage will continue to decrease 20% each year until bonus depreciation is no longer available for property placed in service in 2027. Planning should occur with your tax advisor on how to optimize bonus depreciation.

Section 179 allows taxpayers to completely expense qualified assets in the year of purchase, instead of having to depreciate them over time. The total section 179 deduction for 2024 is $1,220,000. In addition, the amount of section 179 deduction is reduced by the amount of section 179 property placed in service that exceeds $3,050,000. Therefore, a section 179 deduction is not allowed for a taxpayer who placed more than $4,270,000 of section 179 property into service in the 2024 taxable year.

Also known as the book-tax conformity election, this election is an administrative convenience that allows businesses to deduct small-dollar (i.e., up to $2,500 or $5,000 per invoice) expenditures for the acquisition or production of property that otherwise would have to be capitalized, other than amounts paid for inventory or land. The election must be reflected for financial accounting purposes or the books and records of the company as well.

Cost segregation is a strategic tax savings tool that allows companies and individuals who have purchased, constructed, expanded, or remodeled any kind of real estate to immediately increase their cash flow by accelerating their depreciation deductions and deferring their federal and state income taxes. Cost segregation is recognized as an engineering-based tax study accepted by the IRS. The primary goal of cost segregation is to identify, segregate, and reclassify the various building-related assets from either nonresidential real property (39 years) or residential rental property (27.5 years) to a shorter depreciable tax life (e.g., 3, 5, 7, 15, or 20 years). The reclassification of these assets into the shorter depreciable tax lives allows you to take an immediate deduction (60% bonus depreciation) in 2024. However, remember that the 60% bonus depreciation will be reduced by 20% in each year until it disappears completely in 2027. Therefore, if you are planning any type of real estate transaction, the time to pull the trigger is now!

Other cost segregation services include:

Certain corporations (other than large corporations) that anticipate a small net operating loss (NOL) for 2024 and substantial net income in 2025 may find it worthwhile to accelerate just enough of their 2025 income (or to defer just enough of their 2024 deductions) to create a small amount of net income for 2024. This will permit the corporation to base its 2025 estimated income tax installment payments on the relatively small amount of income shown on its 2024 tax return, rather than having to pay estimated taxes based on 100% of its much larger 2025 taxable income.

Employers who experienced a greater than 50% reduction in gross receipts in any calendar quarter in 2020, relative to the same calendar quarter in 2019, or a greater than 20% reduction in gross receipts in any of the first three calendar quarters in 2021, relative to the same calendar quarters in 2019 (or greater than 20% reduction in Q4 2020 relative to Q4 2019), may be eligible to claim the employee retention credit (ERC). The ERC amount is a maximum of up to $5,000 per employee for the 2020 taxable year and up to $7,000 per employee per quarter in the first three calendar quarters of 2021. In addition to the gross receipts decline, an employer can also claim the ERC if it was subject to a governmental order that limited its travel, commerce, or group meetings due to COVID-19. The statute of limitations to file 2020 ERC claims expired this past April, but claims for the 2021 ERC can be filed until April 15, 2025.

Businesses that began carrying on a trade or business after February 15, 2020, had average annual gross receipts of less than $1 million, and do not qualify under the gross receipts or full or partial suspension of operations tests, can receive an ERC of up to $50,000 for each of Q3 & Q4 2021 (max credit of 100,000 for 2021).

Starting in 2022 through 2024, companies are required to amortize their R&E costs over five years (and fifteen years for research conducted outside the U.S.), instead of deducting them immediately each year. This change requires companies to perform a detailed analysis on what costs fall under section 174 for capitalization versus section 162 as an immediate ordinary and necessary business expense. The amount of R&E costs that require capitalization is generally more expansive than the types of qualified research expenditures included in the R&D credit under section 41.

The IRS released Notice 2023-63, as modified by Notice 2024-12, to provide additional guidance surrounding section 174 expenditures. It is effective for tax years ending after September 8, 2023. Businesses should work closely with their tax advisor to understand and properly apply this new guidance, including the review of contract research agreements.

The Inflation Reduction Act of 2022 included a new provision requiring covered corporations to pay a 1% tax on the fair market value of any corporate stock that they redeem after December 31, 2022. A covered corporation is a domestic corporation that has stock traded on an established securities market. The definition of a covered corporation could apply to domestic special purpose acquisition companies (SPACs).

Although the deadline for completing reporting and payment obligations related to the excise tax was delayed, the IRS issued final regulations on June 28, 2024, providing guidance on how to report and pay the 1% tax. These final regulations require that the stock repurchase excise tax be reported on Form 720, Quarterly Federal Excise Tax Return, due for the first full calendar quarter after the end of the corporation’s taxable year, with the Form 7208, Excise Tax on Repurchase of Corporate Stock, attached. Forms 720 and 7208 due for taxable years ending after December 31, 2022, and on or before June 30, 2024, must be filed by the third quarter due date for Form 720, which is October 31, 2024.

For certain C corporations satisfying an active trade or business requirement, shareholders that hold original issuance stock for more than five years can be eligible to have gain on the sale of such stock excluded from tax to the extent of the greater of $10 million or 10 times their original tax basis.

One of the most significant changes stemming from the Inflation Reduction Act of 2022 is the ability for for-profit and not-for-profits entities to convert their clean energy credits to cash. For-profit entities can apply clean energy credits against their federal income tax due. If no federal income tax is due, most clean energy credits can be carried back three taxable years or forward 22 taxable years. However, for-profit entities that would like to monetize a credit quickly can conduct a one-time transfer (i.e., sale) of select clean energy credits to an unrelated party for cash under section 6418.

While in previous taxable years, not-for-profits were limited to capturing the cash benefits related to clean energy credits directly, unless they had unrelated business income tax, under the Inflation Reduction Act of 2022, all not-for-profits are incentivized to invest in clean energy infrastructure through the direct payment program regardless of tax liability. The newly created direct payment option under section 6417 generally allows tax-exempt entities and state or political subdivisions to receive a cash tax refund for applicable credits.

The Inflation Reduction Act extended and modified nine existing federal credits and introduced eight new federal credit opportunities.

Some of the credit highlights include:

The purchase of clean energy credits by an unrelated party for the utilization against their own federal tax liability was a significant change in tax law provided under the Inflation Reduction Act, that is often utilized as a tax planning opportunity for C corporations and high-net-worth individuals.

The sales industry for clean energy credits is currently experiencing significant growth, with the market for transferable tax credits booming. Crux, a sustainable finance technology company that helps clean energy and decarbonization projects get financed in the United States, has estimated that by the end of 2024, U.S. clean energy tax credit transactions will total $20 to $25 billion. Experts predict this trend will continue rapidly in the future.

The purchase of clean energy credits from a seller must be made in cash, and will not result in taxable income or expense for the seller or purchaser respectively.

Credits that are available to purchase include:

The purchase of clean energy credits generally ranges from $0.91 to $0.96 per $1 of credit received. In addition, the purchase, or intended purchase, of clean energy credits can be considered when calculating estimated tax payments.

For example, C corporation has a federal income tax liability of $10,000,000 and is seeking to identify $7,500,000 of clean energy credits for purchase in the 2024 taxable year. A calendar year C corporation generally must make estimated tax payments by April 15th, June 15th, September 15th and December 15th during the taxable year. As the C corporation only expects to pay a tax liability of $2,500,000 in cash, the quarterly estimated tax payments made on the applicable dates is $625,000. C corporation identifies clean energy tax credit in June of 2024 that would be applied amongst the earlier federal estimated tax payment dates. C corporation purchases half of the desired credit, or $3,750,000 credit in August of 2024 and the remaining $3,750,000 in January of 2025. C corporation pays to add $0.94 cents for the credit, or only $7,050,000 for a $7,500,000 credit, saving $450,000 in federal tax payments and is not assessed late payment penalties related to estimated tax payments as they intended to purchase clean energy credits at the beginning of 2024.

Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.