Garry Bartecki The time to start is now
Our topic this month deals with tax planning and an organized approach to minimizing your tax bite as part of your CASH IS KING business practice. The is no doubt about it, the uncertain nature of our economy, inflation, and a lack of qualified personnel justify a tax avoidance policy to pay as little as possible.
Being that your 2022 book results and therefore your tax results are somewhat in the “can” already, I plan to suggest methods to minimize the 2023 tax bill due 16 months from now.
The tax code is EXTREMELY complex, and for equipment dealers, it is even more complex because rental transactions add to the complexity to the point where your normal an IRS agent without a lot of rental experience can drive you up the wall with the potential adjustments they come up with. Consequently, it pays for dealers to work with industry-specific professionals to suggest, explain, execute and deliver a tax avoidance plan as soon as possible for 2023 and beyond based on the current tax code.
As far as 2022 is concerned you should have met with your industry tax expect at least four times before December 31, 2022.
- At the beginning of 2022 discuss how the 2021 return is going to look. How much you have paid in and what you will have to pay for ’21 results as well as estimated payments for ’22? The dealer, of course, has input into the estimated payments if certain events or transactions will change business operations in any way.
- When the ’21 return is delivered ready to be sent to the IRS. There should be a discussion that compares the ’21 returns against the ’20 returns and the previous discussion estimating the tax payments discussed in #1 above. What changed? Why? If changes are negative, how do you avoid them in ’22? And I expect the return to be delivered and processed before the first due date meaning no extensions are required. It does nobody any good to file the ’21 returns in Oct of ’22 because if there were tax reductions to be had you now do not have the time to take full advantage of them. At this same meeting potential changes to the tax code for the current year should be discussed to determine both positive and negative impacts and any steps that can be taken in ’22 to minimize any negative impact they may have. This second meeting also provides input to pass on to customers if your products and services are part of their tax equation.
- A July or August meeting to see how the company is progressing and whether the remaining estimated tax payments are necessary at the level they are set at. If the company’s taxable income is expected to be less than projected perhaps the final two payments can be reduced. This is also a good time to explore any other code changes anticipated for ’23, and how to take advantage of them if time is available.
- In December see how the year is working out and identify any issues or questions about specific transactions that may impact revenue or expenses. This is also a good time to provide a data request to provide the information necessary to prepare the annual return.
I do not believe this is overkill. It is a program to make your tax person’s job easier to produce a plan of attack for your finance department to avoid both unnecessary cash outflows and delays in receiving refunds.
This approach should also apply to the business owners of the C-Corp, S-Corp, or LLC.
And to add to the complexity I have to include a State & Local (SALT) review in the process. As I have mentioned in the past State and Local tax issues are in many cases more complex than the Federal requirements. If you buy, sell, and rent over state lines you have tax requirements. And if you have work-from-home employees you may have a state issue to deal with. And since some states do not allow bonus depreciation, the tax liabilities we are talking about can become substantial. The SALT initial review will cover your nexus status in the states you do business in, along with the sales and use tax requirements required for goods sold in each state involved. There are ways to mitigate these SALT taxes if you change how you process transactions. A good SALT advisor can help with this process (I know a couple of you need assistance). Once the initial SALT review is performed you may only require a “touch base” interaction once a year to stay on track.
One other issue that is sure to surface is how you cost out your goods and services for tax purposes during an inflationary period. For equipment, the price paid is the tax basis of the equipment. The same goes for service work. But how about parts sales? How are you costing your current sales? This may be a good discussion point to ask your tax person about. And what if you decide at some point that the costs you incurred for new and used equipment and parts are no longer recoverable in the then-current market? Can you adjust your cost and take a tax deduction? What process do you have to follow to warrant a deduction?
Speaking of deductions, your CAP-X purchases allow for Bonus and Sec 179 deductions. If you are having a good year and have the ability to purchase equipment or other fixed assets it may pay to complete those transactions in ’23 as opposed to waiting to buy in ’24. That is assuming, of course, that what you need is available. The acquisitions bring additional value because they reduce the 23-tax burden as well as any estimated tax payments due in ’24 based on the ’23 tax due. As a reminder, the units purchased have to be “placed in service” in ’23 to make this work.
Knowing that skilled labor is still an issue it may make sense to take advantage of the HIGHER HEALTH SAVING ACCOUNT LIMITS (HSA’s). This plan associated with a HIGH-DEDUCTIBLE HEALTH CARE PLAN allows employees to save for healthcare expenses on a pre-tax basis.
In a similar fashion contributions to a 401K plan have increased by $2000 starting in ’23. As a matter of fact, employers can take a tax credit off of their tax bill of up to $5,000 for three years for the ordinary and necessary costs of starting a qualified plan.
You have probably been hearing about adopting “cash basis” accounting for tax purposes. In other words, you pick up income when you get paid and deduct expenses paid. IF YOU QUALIFY, and you carry large AR balances the cash basis method can provide benefits you will not find using accrual accounting. I was involved with a company that was primarily in the rental business that qualified. They had a good year, but the profits were still sitting in AR. The year-end tax planning review was completed, and management was ready to write a big check for taxes. With the cash basis method, there was zero tax liability. After a week of considering the options, they opted into the cash basis method and have been filing on that basis since then. I have to think that if the recession they keep talking about happens AR will increase but your bills will still have to be paid. It may make sense to consider this option and see if you could qualify. In any event, wouldn’t it be nice to be able to pay your taxes based on actual cash flow?
There is also a reason to take another look at the estate and gift tax regs since the favorable estate, gift, and generation-skipping transfer tax lifetime exclusions which reached $12,060,000 in ’22 are scheduled to be cut in half in 2026. If estate planning is being considered, now may be the time to have an analysis performed to see where you stand.
Another accounting issue to consider. If you had to change the way you report business activities after a Revenue Recognition Review, you may have to account in the same manner for tax purposes.
And one more issue. Interest rate increases and inflation are causing many companies to reassess their debt arrangements. Restructuring debt can cause significant tax consequences. Make sure you understand this risk if debt restructuring is being considered.
Also, keep in mind that starting in ’23 the Inflation Reduction Act extended energy-related tax breaks and indexed for inflation the energy-efficient commercial building deduction. If you qualify review the opportunity.
The tax regs we have to deal with are complex, but at the same time, they are there to take advantage of. Schedule your first meeting for ’23 now to initiate your ongoing tax avoidance program.
About the Columnist:
Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail [email protected] to contact Garry.
