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  <info.unit><unit.start class.code="600_inc" class.name="Income" copyright.owner="Bloomberg Industry Group, Inc." service.code="tmpg-ref" unit.code="0061-1023" unit.name="2023 Year-End Tax Planning Strategies for Business Entities"/>
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<name>2023 Year-End Tax Planning Strategies for Business Entities</name><document.guide id="2b1f6f32ade844cc92440c3380f18be5" origin.id="a0r8r7g1z0"><toc.entry1><text> <xref.internal ref="8284af2fe3f5435181f7692eb8a50b98">OVERVIEW</xref.internal> </text></toc.entry1><toc.entry1><text> <xref.internal ref="2a617df4be7a4ca7bcc328ff4372e9ce">KEY CONSIDERATIONS</xref.internal> </text></toc.entry1><toc.entry1><text> <xref.internal ref="ef0d95f0f0034003a177ed1526a0a99a">REPORTING</xref.internal> </text></toc.entry1><toc.entry1><text> <xref.internal ref="b33b96cea08b42ada5a07fb2f7a85e1e">STATE CONSIDERATIONS</xref.internal> </text></toc.entry1><toc.entry1><text> <xref.internal ref="d42efbdf62354ba7a1ca4c6e67e93466">INTERNATIONAL CONSIDERATIONS</xref.internal> </text></toc.entry1></document.guide>
<para id="5c3f0d9931874df9b794c6e2863f3754" origin.id="a0r8r7g1z1"><cite.url ref="https://aboutbtax.com/baOP">Download Excel Checklist</cite.url> <line.break/> <line.break/> </para>
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<name>OVERVIEW</name>
<para id="8bb9f767b61047e699ec820c666cc7b1">At the end of each tax year, several tax planning opportunities may be available to help reduce a business entity's tax burden. New laws and regulations present new tax challenges. Having the right tax strategy will help businesses navigate through new compliance challenges and put them on the right track as a new year begins. To take advantage of any such strategy, implementation must be completed by the end of the tax year (December 31 for calendar year taxpayers). This planning guide highlights several potential tax-saving opportunities for business entities to consider.</para>
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<name>KEY CONSIDERATIONS</name>
<para id="TPS\3420.10"><emph face="i">Corporate Alternative Minimum Tax:</emph> The Inflation Reduction Act created a new corporate alternative minimum tax (CAMT) applicable to large corporate taxpayers starting in 2023. The CAMT applies to C corporations with average annual adjusted financial statement income in excess of $1 billion over a three taxable year period. The CAMT is equal to the excess of 15% of the corporation’s applicable adjusted financial statement income less its CAMT foreign tax credit over its regular tax liability and Base Erosion and Anti-Abuse Tax (BEAT) liability. The IRS issued transition relief guidance for 2023 for penalities related to estimated tax payments, but large C corporations will need to be prepared to determine if the CAMT applies and calculate CAMT liability in addition to regular tax liability. [ <cite.bna.reference bna.id.ref="TM\752.IX">752 T.M., IX.</cite.bna.reference>; TPS<cite.bna.reference bna.id.ref="TPS\3420.10"> ¶3420.10.</cite.bna.reference> ]</para>
<para id="287ec3365ae141f18b280c322476f499"><emph face="i">Excise Tax on Stock Repurchases: </emph>The Inflation Reduction Act also created a new excise tax on stock repurchases applicable to stock repurchases occurring after December 31, 2022. The excise tax is 1% of the fair market value of the stock repurchased by a publicly traded, domestic corporation netted against the value of any stock issued by the corporation during the taxable year. The excise tax applies to stock repurchases and other economically similar transactions, but does not apply if the total value of stock repurchased during the taxable year is less than $1 million. The IRS released guidance that taxpayers may rely on until proposed regulations are issued and the excise tax is not required to be reported or paid until the first quarter after proposed regulations have been issued. [<cite.bna.reference bna.id.ref="TM\767.X.G">767 T.M., X.G.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\4820.01.G">¶4820.01.G.</cite.bna.reference>]</para>
<para id="79b601d41f9748e8bb2b462af87566c6"><emph face="b">How Does Deferring Income Help?</emph> </para>
<para id="8c4c2adbf6ec4590981b4f9e63788c72">Although C corporations enjoy a flat 21% statutory tax rate and pass-through entities are taxed at lower rates, income deferral remains an important consideration in business tax planning. If a taxpayer expects taxable income to be higher in 2023 than 2024, or if the taxpayer anticipates being taxed at a higher rate in 2023 than 2024, the taxpayer may benefit by deferring income into 2024. Of course, if a business owner is subject to the individual alternative minimum tax (AMT), an S corporation is subject to the passive investment income tax, or a C corporation is subject to the CAMT in 2024, this type of standard tax planning may not be warranted. Some ways to defer income are discussed below.</para>
<para id="bc7d3ea54a404dddb5a5f60ab2bbfdec"><emph>Use of Cash Method of Accounting: </emph>By adopting the cash method of accounting instead of the accrual method, a taxpayer can generally put itself in a better position to accelerate deductions and defer income. An automatic change to the cash method can be made before the due date of the return including extensions. [<cite.bna.reference bna.id.ref="TM\572.VI.B">572 T.M., VI.B.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3530.02.B">¶3530.02.B.</cite.bna.reference>]</para>
<para id="a28e0e8cbb954c61910c154b1a261181">A business entity generally must obtain IRS consent to change either its overall method of accounting or the accounting treatment of any material item. To do so, the business generally must file Form <cite.fed.form ref="irs\form3115">3115</cite.fed.form>, <emph>Application for Change in Accounting Method.</emph></para>
<para id="2680dec1f26f4109888d832ba80b13d7">Certain C corporations and partnerships with a C corporation partner with average annual gross receipts of $29 million or less for the prior three tax years can make an automatic change to the cash method.</para>
<para id="35428e99f7794fd4b87ba6e30eebf90e">Provided inventories are not a material income-producing factor, sole proprietors, limited liability companies (LLCs), partnerships, and S corporations can change to the cash method of accounting regardless of their average annual gross receipts. [<cite.bna.reference bna.id.ref="TM\570.III.E">570 T.M. III.F.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3530.02.B">¶3530.02.B.</cite.bna.reference>]</para>
<para id="973d6b05e5404af6bdc2c00e0a5b5860"><emph>Installment Sales: </emph>Generally, a sale occurs upon the transfer of property. If gain will be realized on the sale, income recognition will normally be deferred under the installment method until payments are received, so long as one payment is received in the year after the sale. Therefore, if a business expects to sell property prior to the end of 2023, and it makes economic sense, the business should consider selling the property and reporting the gain under the installment method to defer payments (and tax) until 2024 or later. [<cite.bna.reference bna.id.ref="TM\566.II">566 T.M., II.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3550.01.C">¶3550.01.C.</cite.bna.reference>]</para>
<para id="365e752be3594480b1b68390975b26a6"><emph>Delay Billing: </emph>If a taxpayer uses the cash method of accounting, the taxpayer may consider delaying year-end billing to clients so that payments are not received until 2024.</para>
<para id="3e915d5357904197aef8e5374136ded6"><emph>Defer Interest and Dividends: </emph>Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, the taxpayer could consider buying short-term bonds or certificates that will not mature until 2024. [<cite.bna.reference bna.id.ref="TM\501.V.A">501 T.M., V.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\1210.01">¶1210.01.</cite.bna.reference>]</para>
<para id="ae64ea0061b247788b4fde77f0bb4876">A taxpayer will only be taxed in 2023 on dividends constructively received before year-end. Owners of closely-held corporations may consider delaying dividends unless other provisions prevent such delay. [<cite.bna.reference bna.id.ref="TM\501.V.A.4">501 T.M., V.B.4.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\1220.05">¶1220.05.</cite.bna.reference>]</para>
<para id="bdfe2f1fed31416b85d4b2460f8ac61a"><emph face="b">Should the Taxpayer Accelerate Income into The Current Year?</emph> </para>
<para id="47bc1c6d01524ad9afcbbfd46a346bf6">A business taxpayer may benefit from accelerating income into the current year. For example, the taxpayer may anticipate being taxed at a higher rate or being subject to the CAMT in 2024, or perhaps the taxpayer needs additional income this year to take advantage of an offsetting deduction or credit that will not be available in a future tax year. Note, however, that accelerating income into 2023 could be disadvantageous if the taxpayer expects to be in the same or lower tax bracket for 2024.</para>
<para id="9cd8fa015841459f85f8093814ce51f3"><emph>Early Collection: </emph>A business that reports business income and expenses on a cash basis could issue bills and pursue collection before the end of 2023. Also, the taxpayer could check to see if clients or customers are willing to pay for January 2024 goods or services in advance. Any income received using these steps will shift income from 2024 into 2023.</para>
<para id="d2da80e6c71444f695f1b160d0c4fd13"><emph>Qualifying Dividends: </emph>Qualified dividends are taxed at rates similar to the capital gains rates. Qualified dividend income is generally subject to a 15% or 20% rate depending upon statutory thresholds. The thresholds are not tied to specific income tax brackets, but roughly speaking, the 20% rate applies to those in the 37% rate bracket and most of those in the 35% bracket, while the 15% rate applies to those at or above the 22% bracket. Note that qualified dividends may be subject to an additional 3.8% net investment income tax. Qualified dividends are typically dividends from domestic and certain foreign corporations. The corporate board may consider the tax impact of declaring a dividend on its shareholders. If a controlling shareholder is not in the highest capital gains bracket for 2023, but expects to be in a higher bracket in 2024, the controlling shareholder should consider authorizing any dividend payment prior to the end of 2023 to use the more favorable 15% tax rate. [<cite.bna.reference bna.id.ref="TM\643.III.C.4">643 T.M., III.C.4.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\700.VI.E">700 T.M., VI.E.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\740.XIII.B">740 T.M., XIII.B.</cite.bna.reference>]</para>
<para id="aaf6603e683e4f7f86e957393d95f21f"><emph face="b">Should an Owner of a Closely Held Family Business Consider Gifting Interests?</emph> </para>
<para id="5bf8bb6a0c1846ffb07f04d413c558c8">Owners of closely held businesses may want to consider gifting an interest in the business (corporate stock or interests in family limited partnerships or LLCs). A taxpayer may take advantage of valuation discounts (marketability and minority discounts) and the 2023 gift tax exclusion of $17,000 per donee ($34,000 when gift-splitting) when gifting family business interests before year end. [<cite.bna.reference bna.id.ref="TM\722.III.I">722 T.M., III.I.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\835">835 T.M.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\836.IV">836 T.M., IV.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\4095.01.D">¶4095.01.D.</cite.bna.reference>, TPS <cite.bna.reference bna.id.ref="TPS\6350.05.B">¶6350.05.B.</cite.bna.reference>]</para>
<para id="1ac20e392b5140aea331c440fe164c63">Practice Guides &amp; Checklists: <cite.url ref="https://www.bloomberglaw.com/product/tax/document/X7CJUSIG000000"><emph>Estate Planning: Transferring Closely Held Business Interests Using Charitable Techniques (§2701, §170)</emph></cite.url>; <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XDBMC6PC"><emph>Estate Planning: Making Donations of S Corporation Stock (§170)</emph></cite.url>; <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XDBMC6HC"><emph>Estate Planning: Making Donations of Real Estate and Real Estate Partnerships (§170)</emph></cite.url>; <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XDBMC81C"><emph>Estate Planning: Making Donations of Intangibles (Securities, FLPs, Patents, and other assets) (§170)</emph></cite.url>; <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XDEK969C"><emph>Estate Planning: Choosing Between a Grantor Retained Annuity Trust (GRAT) and an Intentionally Defective Irrevocable Trust (IDIT) (§2702)</emph></cite.url>.]</para>
<para id="45c58e9e1c8b442bada2f5c168d5787b"><emph face="b">Are There Business Deductions that Can Be Accelerated into The Current Year?</emph> </para>
<para id="2bc89ff0123544de9bb2da879fee7840"><emph>Bad Debts: </emph>If a business uses the accrual method, business accounts receivable should be analyzed and those receivables that are totally or partially worthless should be written off. By identifying specific bad debts, the taxpayer should be entitled to a deduction. The taxpayer may be able to complete this process after year’s end if the write-off is reflected in year-end financial statements. For non-business bad debts (such as uncollectible loans), the debts must be wholly worthless to be deductible, and will probably be deductible only as a capital loss [<cite.bna.reference bna.id.ref="TM\538.IV">538 T.M., IV.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\538">538 T.M.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2360">¶2360.</cite.bna.reference>]</para>
<para id="d3fe3a7f162a429a8cceb5cd83fbac73"><emph>Current-Year Bonuses: </emph>In general, a taxpayer’s liability for employee bonuses accrues and is deductible for the current year even though the bonus is paid in the following year, if all the events are satisfied that fix the liability and the taxpayer does not have a unilateral right to cancel the bonus at any time prior to payment. Generally, the taxpayer may accelerate the bonus deduction into the current year while the employees will report the income in the following year if they are cash method taxpayers. Furthermore, any compensation arrangement that defers payment will be currently deductible only if paid within 2½ months after the employer’s year-end. [<cite.bna.reference bna.id.ref="TM\570.V.C">570 T.M., V.C.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\712.VI.A">712 T.M., VI.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\1110.01.C.2">¶1110.01.C.2.</cite.bna.reference>; Practice Guides &amp; Checklists: <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XKCQJ91C"><emph>S Corporations: Determining Shareholder-Employee Compensation (§162, §1361), Guaranteed Payments</emph></cite.url>.]</para>
<para id="8fa338d5d6004c8a85185e680e4ea052"><emph>Suspended Passive Losses: </emph>Generally, a taxpayer may have passive losses that have been suspended and are not yet allowed as a deduction. Taxpayers should determine what might be done to identify and absorb or release the suspended losses as part of overall tax planning. [<cite.bna.reference bna.id.ref="TM\716.IV.D">716 T.M., IV.D.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\732.II.B">732 T.M., II.B.</cite.bna.reference>, TPS <cite.bna.reference bna.id.ref="TPS\4040">¶4040.</cite.bna.reference>]</para>
<para id="bcc3ec585b67464aa37c9ac82b5c2dcd"><emph>Prepayment of Taxes: </emph>Taxpayers that pay payroll taxes on a quarterly basis should consider accelerating 4th quarter payroll taxes at December 31 year-end and not waiting until January 15, 2024.</para>
<para id="1dfeae87bfb140f7af2790cdc3eab8ba">Taxpayers should consider accelerating state income estimated taxes and property taxes if possible if they would benefit from a current year state income tax deduction. Pass-through entities taxed at individual rates that are accelerating state income and property taxes should consider AMT implications.</para>
<para id="1c1fc219ebea4ee5a5d6f1b088099795"><emph face="b">What Tax Credits Are Available to the Taxpayer?</emph> </para>
<para id="9fad8ea04a194673bfa782d84da4f72d">Generally, tax credits reduce a taxpayer’s liability on a dollar-for-dollar basis and there are many tax credits available to taxpayers. For example, consider the taxpayer’s eligibility for the following credits: [<cite.bna.reference bna.id.ref="TM\506">506 T.M.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\4310">¶4310.</cite.bna.reference>]</para>
<para id="ce020b605fde44f0a14616ae9ce4719a"><emph>Research and Development (R&amp;D) Tax Credit: </emph>Some business projects, such as those involving development of new or more reliable products, processes, or technics, may be eligible for the R&amp;D tax credit. Eligible small businesses ($50 million or less in gross receipts) may claim the R&amp;D tax credit against alternative minimum tax liability of individuals, and the credit can be used by certain qualified small businesses against the employer’s payroll tax (i.e., FICA) liability. [<cite.bna.reference bna.id.ref="TM\556.II.B.2">556 T.M., II.B.2.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\556.V">556 T.M., V.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3160.03.D">¶3160.03.D.</cite.bna.reference>, TPS <cite.bna.reference bna.id.ref="TPS\3410.02.C">¶3410.</cite.bna.reference>]</para>
<para id="526db59ffa844047bc49c179ae124acc"><emph>Employer Wage Credit for Employees in the Uniformed Services: </emph>Some employers continue to pay all or a portion of the wages of employees who are called to active service. The amount of the credit is equal to 20% of the first $20,000 of differential wage payments to each employee for the taxable year. Employers of any size with a written plan for providing such differential wage payments are eligible for the credit. [<cite.bna.reference bna.id.ref="TM\514.IV.D">514 T.M., IV.D.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3170.29">¶3170.29.</cite.bna.reference>]</para>
<para id="cc5eda5b97c24ff0ab06b590ecc054f3"><emph>Work Opportunity Credit: </emph>The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and eligibility for a tax credit based on the wages paid. The credit is available for first-year wages paid or incurred in the tax year for employees hired and who began work before December 31, 2023. Employers who hire members of targeted groups, including qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more), will be entitled to a credit equal to 40% of the first $6,000 of wages. Employers who hire qualified veterans will be entitled to a credit equal to 40% of a higher wage limit, with the wage limit dependent on the reason for qualification. [<cite.bna.reference bna.id.ref="TM\514.IV.A">514 T.M., IV.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3170.16">¶3170.16.</cite.bna.reference>]</para>
<para id="c2fa0dd88f2445aabae198f826f6c69e"><emph>Small Employer Pension Plan Startup Cost Credit: </emph>Certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. The credit is limited to the greater of (a) $500; or (b) the lesser of (i) $250 for each eligible employee, or (ii) $5,000. Thus, the maximum available credit is limited to $5,000 per year. [<cite.bna.reference bna.id.ref="TM\514.IV.F">514 T.M., IV.F.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3170.12">¶3170.12.</cite.bna.reference>]</para>
<para id="2e93505ad524479aa94ce84c1f6ddd7a"><emph>Small Employer Retirement Savings Auto-Enrollment Credit: </emph>Starting in 2020, certain small business employers that include an eligible automatic contribution arrangement in a qualified employer plan may claim a nonrefundable income tax credit of $500 for each of the first three plan years. [<cite.bna.reference bna.id.ref="TM\514.IV.J">514 T.M., IV.J.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3170.36">¶3170.36.</cite.bna.reference>]</para>
<para id="4754f672a4d24ae9a68af99957288628"><emph>Employer-Provided Child Care Credit: </emph>Employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures,” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures. [<cite.bna.reference bna.id.ref="TM\514.IV.C">514 T.M., IV.C.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3170.13">¶3170.13.</cite.bna.reference>]</para>
<para id="820b7b93d6084555adb350596ddf0421"><emph>Low-Income Housing Credit: </emph>The low-income housing credit may be claimed over a 10-year period by owners of residential rental property used for low-income housing. The amount of credit available depends on whether expenditures were federally subsidized. Among other requirements, low-income housing units may not be used on a “transient” basis. The IRS and Treasury have provided limited exceptions to the transiency rule, including one for disaster relief. After a major disaster, a state housing credit agency may permit owners within its jurisdiction to provide temporary emergency housing (not to exceed 12 months) to displaced individuals who were living within the agency’s jurisdiction at the time of the disaster. Before housing any displaced individuals, the owner must obtain written approval from the agency to participate in “temporary emergency housing” relief. A displaced individual is someone who was displaced from his/her/their principal place of residence as a result of a major disaster and the principal place of residence is in a city, county, or other local jurisdiction designated for “individual assistance” by FEMA. The temporary housing of displaced individuals in low-income units without meeting the documentation requirements will not cause the building to suffer a reduction in qualified basis that would cause the recapture of low-income housing credits. [<cite.bna.reference bna.id.ref="TM\584.V.A">584 T.M., V.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3150.08.A.8">¶3150.08.A.8.</cite.bna.reference>, TPS <cite.bna.reference bna.id.ref="TPS\3150.01">¶3150.01.</cite.bna.reference>]</para>
<para id="c284b58b81164223a91b59fb4caf6e9e"><emph>Employer Credit for Family and Medical Leave Act Wages: </emph>An eligible employer may take a paid family and medical leave credit of between 12.5% and 25% of the wages paid to an employee, depending on what portion of the employee’s normal wages are paid during the leave (minimum 50% of wages). [<cite.bna.reference bna.id.ref="TM\514.IV.I">514 T.M., IV.I.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3170.35">¶3170.35.</cite.bna.reference>]</para>
<para id="461ae6325902438b88b5d4fb93b7df11"><emph>New Markets Tax Credit: </emph>Taxpayers may claim a new markets tax credit equal to 39% of any capital invested in a qualified community development entity. The credit is claimed in seven annual installments beginning in the year of the original investment. [<cite.bna.reference bna.id.ref="TM\585">585 T.M.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3170.11.A">¶3170.11.A.</cite.bna.reference>]</para>
<para id="aa4a8aa845b24e3eacf353a684f5ce48"><emph>Energy Investment Credit: </emph>The energy investment credit is available for investments in certain alternative and renewable energy property and renewable electricity production facilities. The credit is either 10% or 30% of the basis of energy property placed in service during 2023. [<cite.bna.reference bna.id.ref="TM\512.III.A">512 T.M., III.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3140.03.A">¶3140.03.A.</cite.bna.reference>]</para>
<para id="97276b7afa504f62b483b3aa3120d279"><emph>Rehabilitation Tax Credit: </emph>Qualified expenses incurred in the rehabilitation of certified historic structures are eligible for a credit of 20% of such expenses. The credit is claimed in five equal annual installments beginning with the year in which the rehabilitated property is placed in service. [<cite.bna.reference bna.id.ref="TM\586.III">586 T.M., III.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3140.02">¶3140.02.</cite.bna.reference>]</para>
<para id="96e12e19f376411e969e6174f0fbc98d"><emph>Inflation Reduction Act Clean Energy Credits:</emph>The Inflation Reduction Act created many new tax credits available to businesses that incentivize a wide range of activities and investments for the production of clean energy and the conservation of energy and natural resources. Many of these credits are available to businesses starting in 2023. The Inflation Reduction Act also created an election for the direct payment of certain credits and an election for taxpayers to transfer certain credits. Businesses will need examine their activities to determine if they are eligible for these new credits and whether a direct payment election or transfer of the credits could be advantageous. [<cite.bna.reference bna.id.ref="TM\512.III">512.T.M., III.</cite.bna.reference>]</para>
<para id="32b3cc33d363444db997a486d5a761f4"><emph face="b">What Income Exclusions Are Available?</emph> </para>
<para id="290cf257ab89449387814e322e266651"><emph>Qualified Small Business Stock: </emph>Stock acquisitions that qualify as “small business stock” under <cite.usc ref="usc\26\1202">§1202</cite.usc> are subject to special exclusion rules upon their sale as long as a five-year holding period is satisfied. S corporation stock does not qualify for the exclusion. A 100% gain exclusion applies for qualified small business stock acquired after September 27, 2010, and held for more than five years. A 75% exclusion applies for qualified small business stock acquired after February 17, 2009, and before September 28, 2010 (and held for at least five years). A 50% exclusion applies for qualified small business stock acquired before February 18, 2009 (and held for at least five years). [<cite.bna.reference bna.id.ref="TM\760.VII">760 T.M., VII.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\1750.09">¶1750.09.</cite.bna.reference>]</para>
<para id="767947c5ddde48e78f3b95bdcc2c2ee7"><emph face="b">What Business Deductions Are Available to the Entity?</emph> </para>
<para id="68bac21634974dfd92e6f3d63f2ce02d"><emph>Qualified Business Income: </emph>Individual taxpayers with qualified business income (QBI) from a pass-through entity (partnership or S corporation) or a sole proprietorship may be entitled to a deduction equal to the lesser of the deductible amount of the QBI or 20% of taxable income. The deduction applies to reduce taxable income and is available whether or not the taxpayer itemizes. The deduction does not impact the calculation of self-employment tax.</para>
<para id="bcd5ce6bffaf4d0eb59fa383fb3edef2">The trade or business of being an employee is not a qualified trade or business and, therefore, no deduction is allowed for income from the trade or business of being an employee. </para>
<para id="5110ed8b938c49e08c3a331a776b7ddf">The deductible amount of QBI is generally 20%. However, if the taxpayer's taxable income (not factoring in the deduction) exceeds $364,200 (for married taxpayers filing jointly ) or $182,100 (for all other taxpayers), the deduction is subject to a limitation based on W-2 wages paid by the business. [<cite.bna.reference bna.id.ref="TM\537.III.B.1">537 T.M., III.B.1.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\4040.01.F">¶4040.01.F.</cite.bna.reference>]</para>
<para id="4087be8f4c134a9f9d891e8b40bf4314"><emph>Limitation on Business Interest Expense: </emph>The deduction for net interest expenses incurred by a taxpayer is limited to the sum of business interest income, 30% of the business's adjusted taxable income (ATI), and floor plan financing interest, though taxpayers with average annual gross receipts of $29 million or less are exempt from the limit. Further, the limitation does not apply to the trade or business of being an employee, electing real property trades or businesses, electing farming businesses, or certain regulated utilities. [<cite.bna.reference bna.id.ref="TM\536.V.E">536 T.M., V.E.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2330.04.K">¶2330.04.K.</cite.bna.reference>]</para>
<para id="d9bf5910b0e742f39902de6dc0a6ddf8"><emph>Excess Business Loss: </emph>Taxpayers other than C corporations are not allowed to deduct excess business loss. An excess business loss for the tax year is the amount by which a taxpayer’s aggregate deductions attributable to trades or businesses of the taxpayer income exceed the sum of aggregate gross income or gain from those trades or businesses and $578,000 (for married taxpayers filing jointly) or $289,000 (for all other taxpayers). Any excess business loss is carried forward and treated as part of the taxpayer's net operating loss carryforward in succeeding taxable years. Pass-through entities are limited in deducting active business losses against non-business income. [<cite.bna.reference bna.id.ref="TM\710.IV.C.4">710 T.M., IV.C.4.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\732.II.B.1.c">732 T.M., II.B.1.c.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\4040.01.D">¶4040.01.D.</cite.bna.reference>, TPS <cite.bna.reference bna.id.ref="TPS\4270.06.F">¶4270.06.F.</cite.bna.reference>]</para>
<para id="85aaf287ef384b5cba5c17e641d9d4b3"><emph>Equipment Purchases: </emph>Taxpayers (individuals or corporations) purchasing equipment may make a “§179 election,” which allows them to expense (i.e., currently deduct) otherwise depreciable business property, including computer software and qualified real property. Air conditioning and heating units placed in service since 2016 are eligible and continue to be eligible for this deduction. Certain improvements to nonresidential real property (roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems), that may not be eligible for bonus depreciation, are eligible under <cite.usc ref="usc\26\179">§179</cite.usc>. For 2023, taxpayers may elect to expense up to $1,160,000 of equipment costs (with a phase-out for purchases in excess of $2,890,000). The deduction is subject to a business income limit. [<cite.bna.reference bna.id.ref="TM\532.II">532 T.M., II.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2370.11">¶2370.11.</cite.bna.reference>]</para>
<para id="9c8512d90d254c9c910f21f9b34fae5c">In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2023. In general, under the “half-year convention,” taxpayers may deduct six months' worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers the depreciation deduction.) [<cite.bna.reference bna.id.ref="TM\531.VI.C.1">531 T.M., VI.C.1.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2370.05.E">¶2370.05.E.</cite.bna.reference>]</para>
<para id="6f350fb01e7643c4b1774d6c669eb436"><emph>Bonus Depreciation: </emph>For property acquired after September 27, 2017, and placed in service during 2023, a taxpayer may deduct 80% of the cost of qualified property in 2023. Bonus depreciation applies to new as well as used property, so taxpayers planning to acquire a business should consider whether structuring the acquisition as an asset acquisition rather than a stock acquisition would be advantageous. [<cite.bna.reference bna.id.ref="TM\532.III">532 T.M., III.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2370.12">¶2370.12.</cite.bna.reference>]</para>
<para id="aaeca8d17a2b435887daee5bced1423f"><emph>Vehicles Weighing over 6,000 Pounds: </emph>A popular strategy is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the dollar limit for depreciation of passenger vehicles of $12,200 in 2023 (if bonus depreciation is taken, the amounts increase to $20,200). For SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $28,900. [<cite.bna.reference bna.id.ref="TM\519.VI.B.1.a">519 T.M., VI.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2310.05.B.6">¶2310.05.B.6.</cite.bna.reference>]</para>
<para id="99a1339f926644caa2501242953549b7"><emph>Self-Employed Health Insurance Premiums: </emph>Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 10%-of-AGI floor. Self-employed health insurance includes eligible long-term health care premiums. [<cite.bna.reference bna.id.ref="TM\505.IV.E.4">505 T.M., IV.E.4.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2170.03.B">¶2170.03.B.</cite.bna.reference>]</para>
<para id="c1bb0693d45344b4bf9a9083a93c31e8"><emph>Capitalization of Tangible Property: </emph>Recent rules clarify whether certain items purchased for use in a business (i.e., copiers, computers) can be expensed in the year purchased, or must be capitalized and deducted over several years. The rules include certain elections that may simplify recordkeeping and/or increase current deductions. [<cite.bna.reference bna.id.ref="TM\531.VII.B">531 T.M., VII.B.</cite.bna.reference>]</para>
<para id="e8f38d70de7f4fffabfdd2f1ff15a517"><emph>Home Office Deduction: </emph>For self-employed individuals, expenses attributable to using a home office as a business office are deductible if the home office is used regularly and exclusively: (1) as a taxpayer's principal place of business for any trade or business; (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business. If a taxpayer uses part of the home as a business office, determining the amount of any deduction available can be tricky, but an IRS-provided safe harbor could be used to minimize audit risk. [<cite.bna.reference bna.id.ref="TM\547.III.B">547 T.M., III.B.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2460.02">¶2460.02.</cite.bna.reference>]</para>
<para id="3a35c6458e5243eca42c15d0ce6f09ea"><emph>NOL Carryfoward and Carryback: </emph>If the taxpayer expects to suffer a net operating loss for 2023, it may generally carry the loss forward indefinitely, but may not carry back the loss. A farming loss may be carried back two years or forward indefinitely. Non-life insurance companies with a net operating loss in 2023 may carry the loss back two years but may only carry the loss forward 20 years. Taxpayers may elect to waive the carryback period and instead choose only to carry forward losses. If the taxpayer has any net operating loss carryforwards from prior tax years, deductions for losses arising before 2018 are deductible up to 100% of the taxpayer's taxable income, while deductions for losses arising after 2017 are limited to 80% of taxable income. [<cite.bna.reference bna.id.ref="TM\539.IV.A.1">539 T.M., IV.A.1.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\539.IV.B.1">539 T.M., IV.B.1.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\780.I.A">780 T.M., I.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2410.04">¶2410.04.</cite.bna.reference>]</para>
<para id="6c2f7833ce7f48fea14f15f50a426f23">A taxpayer that expects a tax loss for the current year and has paid estimated taxes should consider seeking a quick refund of overpayments. A corporation may file Form <cite.fed.form ref="irs\form4466">4466</cite.fed.form>, <emph>Corporation Application for Quick Refund of Overpayment of Estimated Tax,</emph> to recover any overpayment of estimated tax for the tax year over the final income tax liability expected for the tax year. Be aware that if a corporation has a loss in 2023 and income in 2024, it will have to make estimated tax payments for 2024. For losses expected to be incurred on an individual return, the filing of Form <cite.fed.form ref="irs\form1045">1045</cite.fed.form>, <emph>Application for Tentative Refund,</emph> may be applicable. [<cite.bna.reference bna.id.ref="TM\539.VIII.A">539 T.M., VIII.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2410.09">¶2410.09.</cite.bna.reference>]</para>
<para id="3f94eb4e6c874eba8beba942afba3e88"><emph>Inventories of Subnormal Goods: </emph>A business should check for subnormal goods in inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If a business has subnormal inventory as of the end of 2023, the taxpayer can take a deduction for any write-downs associated with that inventory provided they offer it for sale within 30 days of the inventory date. The inventory does not have to be sold within the 30-day timeframe. [<cite.bna.reference bna.id.ref="TM\578.IV.A.4">578 T.M., IV.A.4.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3590.05.C">¶3590.05.C.</cite.bna.reference>]</para>
<para id="d399bef687d54c2887c6be37f4b3a8b0"><emph>Business Travel, Meals and Entertainment Expenses: </emph>Although significantly limited, business deductions for meal and entertainment expenses are still available in certain circumstances. A more complete discussion of the rules and requirements governing the deductibility of such expenses can be found in Practice Guides &amp; Checklists: <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XCRCDP1C"><emph>Deducting Travel and Transportation Expenses (§162(a), §274(d))</emph></cite.url>; <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XCRDET1C"><emph>Substantiating Business Expenses (§274(d))</emph></cite.url>.</para>
<para id="ae4dce3802e74a49908343ae648311c3"><emph>Charitable Contributions: </emph>A charitable contribution deduction is available to businesses. A corporation is generally allowed to deduct charitable contributions up to 10% of its taxable income for cash contributions made in calendar year 2023. Contributions by pass-through entities are allocated to individual equity interest holders and are subject to the individual's limitations. An individual is generally allowed to deduct charitable contributions up to 60% of adjusted gross income. Certain contributions of property are subject to additional limits as well as additional recordkeeping and substantiation requirements. [<cite.bna.reference bna.id.ref="TM\794.II">794 T.M., II.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\521.VIII.A">521 T.M., VIII.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\2390.05">¶2390.05.</cite.bna.reference>]</para>
<para id="06d11fba41614ccaa101ea214257c9e2"><emph face="b">Should a Corporation Make an S Corporation Election?</emph> </para>
<para id="19adb5c09cf0497fab78d320e30607c9"><emph>S Corporation Election: </emph>For an otherwise eligible C corporation, consider whether an S corporation election would make sense. A detailed tax analysis needs to be prepared, which should include a comparative discounted after-tax, cash-flow analysis of C status versus S status. The analysis would focus on the marginal and effective tax rates on corporate income under various scenarios as a C corporation and S corporation. [Practice Guides &amp; Checklists, <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XK9IUP9C"><emph>S Corporations: Making an S Corporation Election (§1362)</emph></cite.url>.]</para>
<para id="7de24390827d4596a38c778ac35995ac"><emph>Passive Income and S Corporations</emph>: S corporations that were formerly C corporations, and that have subchapter C earnings and profits at year-end, need to monitor the amount of their passive income, or subject themselves to the passive income tax for termination of their S corporation status. S corporations can avoid both of these consequences by electing to distribute the subchapter C earnings and profits first, or by making a consent dividend election. Either the distribution or consent dividend can purge the S corporation of all its earnings and profits at year-end. For the closely held C corporation, an S corporation election needs to be considered from time to time. In considering a conversion to S status, the C corporation must first confirm its eligibility. A key component of this analysis will include assumptions on potential sources of passive investment income the converting C corporation may have as an S corporation, e.g., gross receipts from royalties, rents, dividends, interest, or annuities. If the converting C corporation will have accumulated earnings and profits (E&amp;P) at the end of any of its subchapter S tax years, and it has the requisite gross receipts from passive investment income, a passive investment income tax may apply. [Practice Guides &amp; Checklists, <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XK9IUQ9C"><emph>S Corporations: Planning for Passive Investment Income Tax (§1375)</emph></cite.url>.]</para>
<para id="50abbe900af34fcda03744850d22f8bb"><emph>Built-in Gains and S Corporations: </emph>S corporations with recognized built-in gains subject to the built-in gains tax can offset these gains with recognized built-in losses before the corporation's tax year ends and eliminate the tax. [Practice Guides &amp; Checklists, <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XKCQJ7HC"><emph>S Corporations: Planning for Built-In Gains Tax (§1374)</emph></cite.url>.]</para>
<para id="09f8f948b7da49bdb1af5d3e0ce38761"><emph>Closing the Books and S Corporations: </emph>When an S corporation terminates its status, a shareholder terminates its interest, or there is a qualifying disposition of stock, an election to close the books is available. [Practice Guides &amp; Checklists, <cite.url ref="https://www.bloomberglaw.com/product/tax/document/X62DI51K000000"><emph>S Corporations: Dealing with Termination of S Status (§1362)</emph></cite.url>.]</para>
<para id="0221befd23af437d8561aafc7f5da4dc"><emph face="b">What Health Care and Other Benefit Planning is Available?</emph> </para>
<para id="27453418e8f14403a85da5846b57ee6d"><emph>Pay or Play Excise Tax: </emph>For the 2023 plan year, a taxpayer that has 50 or more full-time equivalent employees could be subject to an excise tax, which could be up to $2,880 per full-time employee, for failure to offer a health care plan that is minimum essential coverage to at least 95% of the full-time employees if at least one employee obtains subsidized coverage through a public health insurance exchange. The first 30 workers are excluded from this calculation. If the taxpayer does offer coverage but it is not adequate or is unaffordable, the excise tax could be up to $4,320 for each full-time employee who obtains subsidized coverage through an exchange. Smaller employers should review whether they have undergone, or will soon undergo, any changes to their business structure that would require them to be aggregated with other entities and subject them to potential liability. Larger employers should consider their health care plan options in light of this potential excise tax liability. [<cite.bna.reference bna.id.ref="TM\332">332 T.M.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\335.IX.A">335 T.M., IX.A.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\5920.16.C.5">¶5920.16.C.5.</cite.bna.reference>]</para>
<para id="97a5a6f69bf84b64bc3630e62cc1803e"><emph>Health Care Reporting: </emph>Filings for 2023 Forms <cite.fed.form ref="irs\form1095-C">1095-C</cite.fed.form> and <cite.fed.form ref="irs\form1094-C">1094-C</cite.fed.form>, generally for employers with 50 or more full-time equivalent employees, and Forms <cite.fed.form ref="irs\form1095-B">1095-B</cite.fed.form> and <cite.fed.form ref="irs\form1094-B">1094-B</cite.fed.form>, for employers with self-insured plans and other providers of minimum essential coverage, are due by February 28, 2024, if the taxpayer is filing on paper, or by April 1, 2024, if the taxpayer is filing electronically. Statements to employees are due by March 1, 2024 (automatic 30-day extension of original January 31, 2024 due date). [<cite.bna.reference bna.id.ref="TM\335\wks18">335 T.M., Worksheet 18</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\5920.16.C.5.c">¶5920.16.C.5.c.</cite.bna.reference>, TPS <cite.bna.reference bna.id.ref="TPS\5920.2400">¶5920.2400.</cite.bna.reference>]</para>
<para id="416ab6fb1e744c0cb08c1d75542e1526"><emph>Health Reimbursement Arrangements: </emph>Certain small employers that want to assist their employees in obtaining health insurance may choose to set up a qualified small employer health reimbursement arrangement. The QSEHRA, unlike other health reimbursement arrangements, is a tax-favored arrangement that is not considered a group health plan and does not expose the employer to excise taxes for not satisfying Affordable Care Act insurance market requirements. It's available to employers that have fewer than 50 full-time equivalent employees, do not offer any health plan, and meet other requirements. [<cite.bna.reference bna.id.ref="TM\330.X">330 T.M., X.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\5920.16.D.8.c">¶5920.16.D.8.c.</cite.bna.reference>]</para>
<para id="8085597b2b794b2ebc0f90af5e5a3d14"><emph>Credit for Employee Health Insurance Expenses of Small Employers: </emph>Some small employers that provide health coverage to their employees through a Small Business Health Options Program (SHOP) Exchange may be eligible to claim a credit in 2023 if they pay at least half of the premiums for health insurance coverage for their employees. Generally, employers with 10 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $30,700 or less are eligible for the full credit. The credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $30,700. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $61,400 or more. The credit is available on a sliding scale for up to 50% of the employer's contribution toward employee health insurance premiums. The credit is available only for two consecutive taxable years after 2013, so it is not available to a taxpayer if, for example, the taxpayer or a predecessor claimed it for 2020–2021, or 2021–2022. [<cite.bna.reference bna.id.ref="TM\335.X">335 T.M., X.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3170.33">¶3170.33.</cite.bna.reference>]</para>
<para id="a791fbbfbac7457986c568b04522e643"><emph>Employee Transportation Expenses: </emph>Employers may not deduct expenses paid or incurred in 2023 for transportation benefits provided to employees for commuting between home and work unless the expense is necessary to ensure the safety of the employee. Except for bicycle commuting benefits, all or a portion of the benefit still is excludible from the employee's income, however. [<cite.bna.reference bna.id.ref="TM\394.II.B.2.d.(4)(c)">394 T.M., II.B.2.d.(4)(c)</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\5960.02.D.2">¶5960.02.D.2.</cite.bna.reference>]</para>
<para id="8150d61ae8f74b198027345e962cff0c">Generally these plans are applicable to self-employed individuals. The SEP-IRAs and 401(k) plan are deferral opportunities. The taxpayer maximizes contributions to these plans — $30,000 for self-employed 401(k) if age 50 or older, and even more for the SEP-IRAs depending on self-employment income. A Roth conversion makes sense if the current year tax rate is lower (a conversion accelerates income) than the marginal rate when the principal is withdrawn. [<cite.bna.reference bna.id.ref="TM\358.VIII.A">358 T.M., VIII.A.</cite.bna.reference>; <cite.bna.reference bna.id.ref="TM\368.II.G">368 T.M., II.G.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\5560.01.C">¶5560.01.C.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\5620.02.D">¶5620.02.D.</cite.bna.reference>]</para>
</content.group>
<content.group id="ef0d95f0f0034003a177ed1526a0a99a">
<name>REPORTING</name>
<para id="15a1e28ac2ec4e2e9a204e04037c5f58"><emph>Form 1120: </emph>A corporation must file a tax return every taxable year, regardless of the relevant amount of gross income. C corporations file Form <cite.fed.form ref="irs\form1120">1120</cite.fed.form>, which is due by the 15th day of the fourth month following the close of the corporation's taxable year. A calendar year corporation, for example, files its return by April 15. Exception: for June 30 fiscal year C corporation filers, the filing deadline is September 15.</para>
<para id="36cbff046d1f4ffea2ede383bc32f40b"><emph>Review Schedule Requirements: </emph>For example, a taxpayer must disclose certain uncertain tax positions on Schedule UTP if the taxpayer files Form <cite.fed.form ref="irs\form1120">1120</cite.fed.form> (Form <cite.fed.form ref="irs\form1120-F">1120-F</cite.fed.form>, Form <cite.fed.form ref="irs\form1120-L">1120-L</cite.fed.form>, Form <cite.fed.form ref="irs\form1120-PC">1120-PC</cite.fed.form>, including protective filings) and meets certain other requirements.</para>
<para id="dcf51d4d9d3a490aa8e82b8554a363fb">There is generally an automatic six-month extension for calendar year C corporations, and an automatic seven-month extension for fiscal-year C corporations with a taxable year ending on June 30.</para>
<para id="716d48fd82114f06b9b6908ff0766e82"><emph>Form 1120-S: </emph>An S corporation must file Form <cite.fed.form ref="irs\form1120S">1120-S</cite.fed.form>, which is due by the 15th day of the third month following the close of the S corporation's taxable year. A calendar year S corporation, for example, files its return by March 15.</para>
<para id="c5383abcdbba45a4994c18dee54f4a41"><emph>Form 1065: </emph>A partnership must file Form <cite.fed.form ref="irs\form1065">1065</cite.fed.form>, which is due by the 15th day of the third month following the close of the partnership's taxable year. A calendar year partnership, for example, files its return by March 15.</para>
<para id="f67da6da69404fc884304316036dbbd6"><emph>Review Schedule Requirements: </emph>For example, capital gains and losses of partnerships are reported on Schedule D of <cite.fed.form ref="irs\form1065">IRS Form 1065</cite.fed.form>, and each partner's proportionate share of the long-term and short-term gain or loss is reported on Schedules K-1 of <cite.fed.form ref="irs\form1065">IRS Form 1065</cite.fed.form> and on the partner's separate income tax return.</para>
<para id="9767d9ffa36040b0bbaa99df87695b8c"><emph>FBAR: </emph>U.S. persons holding any financial interest in, or signature or other authority over, a foreign financial account with a balance exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department. The due date for 2023 is the same as the U.S. tax filing deadline of April 15, 2024 (unless extended by a weekend or holiday), with an automatic six-month extension to October 15. Accordingly, specific requests for this extension are not required. [<cite.bna.reference bna.id.ref="TM\6085.II.K">6085 T.M., II.K.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\7170.02.B.1.c">¶7170.02.B.1.c.</cite.bna.reference>]</para>
<para id="a34562eb3ab94bc08c15c87249fc5f88"><emph>FATCA: </emph>The Foreign Account Tax Compliance Act (FATCA) requires reporting and possible withholding on payments made to foreign entities, whether the foreign payees are financial institutions or not. All compliance processes need to be in place in advance of making any payments to foreign entities. [<cite.bna.reference bna.id.ref="TM\6565">6565 T.M.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\7170.07">¶7170.07.</cite.bna.reference>]</para>
<para id="b40f01e2cf964a7f9a2b1ae379c0f175"><emph>Electronic Funds Transfer: </emph>A corporation must make its deposits of income tax withholding, FICA, FUTA, and corporate income tax by electronic funds transfer (EFT), including through the IRS's Electronic Federal Tax Deposit System (EFTPS).</para>
<para id="f5fb1e53beab46bfa98f9975810dc912"><emph>Penalties: </emph>Taxpayers should be made aware of any penalties that may apply. The tax code imposes a host of penalties for late-filed returns, failure to file returns, failure to furnish information returns, and failure to pay tax. Many penalties are subject to inflation adjustments. [<cite.bna.reference bna.id.ref="TM\634">634 T.M.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3830">¶3830.</cite.bna.reference>]</para>
<para id="4f54a6b0e1664bbb95ca678d85f4ff9a"><emph>Estimated Tax Payments: </emph>A corporation (other than a large corporation) generally may be able to avoid any underpayment penalties by paying estimated taxes based on 100% of the tax shown on the prior year return. A large corporation is a corporation that had taxable income of $1 million or more for any of the three tax years immediately preceding the current year. [<cite.bna.reference bna.id.ref="TM\581.IV">581 T.M., IV.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3330.01">¶3330.01.</cite.bna.reference>]</para>
<para id="946b5ad9e66e424786d06a96278a128e"><emph>Documentation: </emph>Before the end of the year the taxpayer should hold any required board meetings, properly document any minutes, and collect any documentation that may be needed to substantiate tax returns upon audit. [Practice Guides &amp; Checklists, <cite.url ref="https://www.bloomberglaw.com/product/tax/document/XCRDEU9C"><emph>Partnerships: Working with the Partnership Audit Rules (pre-2018 §6221–§6252 and Post-2017 §6221–§6241)</emph></cite.url>.]</para>
</content.group>
<content.group id="b33b96cea08b42ada5a07fb2f7a85e1e">
<name>STATE CONSIDERATIONS</name>
<para id="cbe007888dd744cfb6c065a7c5cda3f5">While many states follow federal tax rules, some states decouple from certain federal tax provisions. Additionally, many states do not conform to changes made by the 2017 TCJA, the CARES Act, the Inflation Reduction Act, and other recent legislation, which may impact year-end tax planning opportunities. For more information about state considerations when planning for the end of the tax year, see the Bloomberg Tax, <cite.url ref="https://www.bloomberglaw.com/product/tax/bbna/chart/2/10076">I.R.C. Conformity Chart Builder</cite.url>, and the Bloomberg Tax State Navigators for <cite.url ref="https://www.bloomberglaw.com/product/tax/toc_view_menu/3373">Corporate Income Tax</cite.url>, <cite.url ref="https://www.bloomberglaw.com/product/tax/toc_view_menu/3370">Pass-Through Entities</cite.url>, and <cite.url ref="https://www.bloomberglaw.com/product/tax/toc_view_menu/3926">Credits and Incentives</cite.url>.</para>
</content.group>
<content.group id="d42efbdf62354ba7a1ca4c6e67e93466">
<name>INTERNATIONAL CONSIDERATIONS</name>
<para id="32005aa482624a66b15f9b338dee46fb"><emph>Worldwide Taxation: </emph>U.S. persons, including resident aliens, are taxed on their worldwide income at graduated rates regardless of whether the income is U.S.- or foreign-sourced. Foreign-sourced income is taxed by the United States without regard to whether it is earned income, income from a trade or business, or investment-based income. [<cite.bna.reference bna.id.ref="TM\6000">6000 T.M.,</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\7150.01">¶7150.01.</cite.bna.reference>]</para>
<para id="1a051fb1fa0348bea899f816868c815f"><emph>Transition Tax Under §965: </emph>U.S. shareholders that opted on their 2017 tax returns to pay the transition tax (15.5% on cash and cash equivalents; 8% on noncash assets) in installments over an eight-year period should be aware that certain events can result in future installment payments being accelerated and due immediately. These include a disposition of substantially all of the taxpayer's assets (including in a bankruptcy action), the taxpayer becoming a member of a consolidated group, or the dissolution or discontinuation of the consolidated group of which the taxpayer was a member. In addition, payments in excess of any installment amount that is due are not refundable but are applied to the next successive annual installment. [<cite.bna.reference bna.id.ref="TM\6280.VIII">6280 T.M., VIII.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\7150.04.A.4">¶7150.04.A.4.</cite.bna.reference>]</para>
<para id="1dfde9c630ab43638941ee9769e2003d"><emph>Deductions for Certain Dividends Received from Foreign Corporations: </emph>A domestic corporation that receives a dividend from a “specified 10-percent owned foreign corporation,” and with respect to which the domestic corporation is a U.S. shareholder, may be entitled to a dividend received deduction under <cite.usc ref="usc\26\245A">§245A</cite.usc> (<cite.usc ref="usc\26\245A">§245A</cite.usc> DRD). A specified 10%-owned foreign corporation is a foreign corporation that has any domestic corporation as a U.S. shareholder and a U.S. shareholder is any U.S. person that owns 10% or more (by vote or value) of stock of the foreign corporation. The amount of the <cite.usc ref="usc\26\245A">§245A</cite.usc> DRD is equal to 100% of the “foreign-source portion” of the dividend. Note, however, that certain holding period requirements apply. Any taxpayer that receives a <cite.usc ref="usc\26\245A">§245A</cite.usc> DRD may not claim a foreign tax credit or take a deduction for any taxes paid or accrued with respect to the dividend for which the <cite.usc ref="usc\26\245A">§245A</cite.usc> DRD is allowed. The <cite.usc ref="usc\26\245A">§245A</cite.usc> DRD is beneficial for taxpayers, and if they have not already considered reviewing their business structure, it is not too late to undertake such a review to ensure that they benefit from this deduction. [<cite.bna.reference bna.id.ref="TM\6130.III">6130 T.M., III.</cite.bna.reference>]</para>
<para id="fe3a8d4b7bd7423d9fedaedf97f02d5d"><emph>Base Erosion and Anti-Abuse Tax: </emph>The base erosion and anti-abuse tax (BEAT) under <cite.usc ref="usc\26\59A">§59A</cite.usc> is intended to discourage the use of deductible amounts, paid to foreign related parties, to reduce the U.S. tax base. The BEAT applies to certain corporations with average annual gross receipts of at least $500 million for the three-year period ending with the preceding taxable year. To determine BEAT liability, a specified rate is multiplied by the taxpayer's modified taxable income. The resulting amount is then reduced by the excess of the regular tax liability over certain credits. The specified rate for 2023 is 10%. The regulations implementing the BEAT are designed to prevent the avoidance of the BEAT, so an abundance of caution is needed when planning around the BEAT. It is recommended, however, that taxpayers review their structure to determine whether they are subject to the BEAT, in which case, certain reporting obligations may apply. If reporting requirements are not complied with, penalties starting from $25,000 may apply. [<cite.bna.reference bna.id.ref="TM\6125">6125 T.M.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\6580.II.C.3">6580 T.M., II.C.3.</cite.bna.reference>; <cite.bna.reference bna.id.ref="TM\6840.XV.A">6840 T.M., XV.A.</cite.bna.reference>; <cite.bna.reference bna.id.ref="TM\900.II.G.1">900 T.M., II.G.1.</cite.bna.reference>]</para>
<para id="abb8ecd840c04525bc47de6da2bd1565"><emph>Global Intangible Low-Taxed Income (GILTI): </emph>A U.S. shareholder of any controlled foreign corporation (CFC) is required to include in income (in a manner similar to subpart F inclusions) the shareholder's GILTI for the taxable year. However, because the computation of GILTI is based on a percentage of the bases of certain tangible assets, earnings attributable to certain higher than routine returns on tangible assets that are earned in jurisdictions with no tax or low tax rates may also be taxed under the GILTI regime. GILTI is calculated at the U.S. shareholder level. A domestic corporation (or a U.S. shareholder who is an individual making an election to be taxed as a corporation under <cite.usc ref="usc\26\962">§962</cite.usc>) is eligible for a deduction under <cite.usc ref="usc\26\250">§250</cite.usc> with respect to GILTI inclusions; resulting in an effective tax rate of 10.5% on GILTI. A taxpayer may be eligible for 80% of foreign tax credits associated with the GILTI inclusions. With respect to GILTI inclusions, however, no carryback or carryforward of foreign tax credits is permitted. [<cite.bna.reference bna.id.ref="TM\6200.XII.B">6200 T.M., XII.B.</cite.bna.reference>; <cite.bna.reference bna.id.ref="TM\6215">6215 T.M.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\7150.04.A.1">¶7150.04.A.1.</cite.bna.reference>]</para>
<para id="b61102a6dd384e588cd3f04090f0131c"><emph>Foreign-Derived Intangible Income: </emph>FDII is a domestic corporation’s intangible income derived from serving foreign markets, determined on a formulaic basis Domestic corporations are entitled to a reduced rate of tax on FDII, achieved by means of a deduction against FDII. For 2023, the deduction is 37.5% of FDII. To benefit from this deduction, a taxpayer must establish to the satisfaction of the Secretary that income is derived in connection with the sale of property for foreign use or from the provision of services to a person located outside the United States. It is recommended that taxpayers gather and retain documentation that show the portion of their income that qualifies as FDII to benefit from this deduction. [<cite.bna.reference bna.id.ref="TM\6200.XII.C">6200 T.M., XII.C.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\6200.XII.D">6200 T.M., XII.D.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\7150.04.A.1.c">¶7150.04.A.1.c.</cite.bna.reference>]</para>
<para id="b7030feb8374428581a871caf573fab5"><emph>Intercompany Transfer Pricing: </emph>Another area that requires attention is transfer pricing. The mechanics of the transfer pricing rules continue to apply as in prior years. However, the IRS's authority to require the valuation of transfers of intangibles on an aggregate basis or on the basis of the realistic alternatives to such transfers has been confirmed by statute. In addition, the definition of “intangible property” has been expanded to include goodwill, going concern value, and workforce in place. Therefore, if a taxpayer engaged in transactions that involved the transfer of intangibles during the year, the taxpayer must keep in mind that the IRS may arrive at a different value if the IRS determines that the most reliable means of valuation of such transfers is the realistic alternatives method or the aggregate basis method. Of course, the possibility of a revaluation by the IRS would be of relevance only if the taxpayer's method differs from the realistic alternatives or aggregate basis method. [<cite.bna.reference bna.id.ref="TM\6900">6900 T.M.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\3600">¶3600.</cite.bna.reference>]</para>
<para id="57ac3ff153fb461db81e4ec342e00adc"><emph>Controlled Foreign Corporations and Subpart F Income: </emph>U.S. shareholders are generally required to include in income their pro rata share of subpart F income and the amount determined under <cite.usc ref="usc\26\956">§956</cite.usc> of any CFC whose stock they owned on the last day, in such year, on which the corporation is a CFC. A “U.S. shareholder” includes any U.S. person that owns stock in the foreign corporation constituting 10% or more (by vote or value) of the stock of the corporation. Also, under the attribution rules a U.S. person can be treated as owning stock that is owned by a person who is not a U.S. person. However, the final <cite.usc ref="usc\26\956">§956</cite.usc> regulations issued in 2019 allow certain corporate U.S. shareholders of CFCs to reduce the amount of income inclusion determined under <cite.usc ref="usc\26\956">§956</cite.usc> to the extent the shareholders are eligible for <cite.usc ref="usc\26\245A">§245A</cite.usc> DRD. It is, therefore, important to review the taxpayer's ownership structure to determine whether these changes apply to them. Moreover, because of the <cite.usc ref="usc\26\245A">§245A</cite.usc> DRD, certain amounts that would be includible in income when invested in U.S. property by a CFC may be distributed to the taxpayer free of U.S. tax. The taxpayer may then use such untaxed amounts for investments or other purpose. [<cite.bna.reference bna.id.ref="TM\6200.IV">6200 T.M., IV.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\6200.V">6200 T.M., V.</cite.bna.reference>, <cite.bna.reference bna.id.ref="TM\6200.VII.B">6200 T.M., VII.B.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\7150.04.A">¶7150.04.A.</cite.bna.reference>]</para>
<para id="e2caa9da195e454bb5a0d8b5730fb194"><emph>Sale of Interest in Partnerships Engaged in U.S. Trade or Business: </emph>A nonresident alien individual or foreign corporation that owns, directly or indirectly, an interest in a partnership that is engaged in a U.S. trade or business may be treated as deriving gain or loss that is effectively connected with such trade or business upon the sale or exchange of all or a portion of the partnership interest. A nonresident alien individual or foreign corporation that is treated as deriving effectively connected gain or loss, as described above, may be subject to a withholding tax. Generally, if withholding is required, the transferee must withhold 10% of the amount realized on the sale or exchange of the partnership interest. Thus, a taxpayer purchasing any such interest from a foreign person may be required to withhold 10% of the amount realized. If the taxpayer fails to withhold the correct amount, the partnership in which the taxpayer owns an interest is obligated to deduct and withhold from distributions to the taxpayer in the amount equal to 10% of the gain realized by the transferor plus interest, if any. However, there is no liability for failure to withhold, or any interest, penalties, or additions to tax, if the person required to withhold establishes that no gain on the transfer is treated as effectively connected with the conduct of U.S. trade or business. [<cite.bna.reference bna.id.ref="TM\6680.V.G">6680 T.M., V.G.</cite.bna.reference>]</para>
<para id="cecc8472e4a8427282fdb3e087d342bf"><emph>Outbound Transfers of Property Used in Trade or Business: </emph>Generally, a U.S. person engaged in an outbound transfer of property to a foreign corporation recognizes gain even though such a transfer, in a purely domestic setting, may enjoy non-recognition treatment. Therefore, the taxpayer should review its business structure to determine whether making such outbound transfers is economically viable, in light of the introduction of new tax regimes such as GILTI and FDII. [<cite.bna.reference bna.id.ref="TM\6100.II">6100 T.M., II.</cite.bna.reference>; TPS <cite.bna.reference bna.id.ref="TPS\7150.07.A">¶7150.07.A.</cite.bna.reference>]</para>
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