Year-End Tax Planning: 10 Essential Moves for Small Businesses to Maximize Tax Breaks in 2023

QTA Consultants, Ltd./Renata Bliumaite

Year-end tax planning isn’t just for individuals. It’s more important than ever for a small business to take advantage of the tax breaks currently on the books.

Strategy: Coordinate an in-depth year-end tax plan. In particular, be sure to account for all the latest laws of the land. Keeping that in mind, here are 10 tax-saving moves to contemplate at the end of the year.

1. Place equipment in service. Thanks to changes in the Tax Cuts and Jobs Act (TCJA), your business can potentially write off all or most of the cost of qualified business property placed in service in the current tax year, including equipment. The 2017 law hiked the first-year Section 179 depreciation deduction to $1.16 million for eligible assets placed in service in tax years beginning in 2023, and also allows 80% first-year bonus depreciation for eligible assets placed in service in calendar year 2023. Tip: Equipment placed in service anytime in 2023—even as late as December 31—can potentially qualify for both of these first-year depreciation tax breaks.

2. Start a new retirement plan. SECURE 2.0, enacted in late 2022, provides enhanced tax credits for small business operations. Key point: Beginning in 2023, the new law authorizes a 100% tax credit (up from 50%) for the first three years for employers with 50 or fewer employees. The credit is limited to $5,000 per year. Employers with 51–100 employees are eligible for the 50% credit for the first three years, with an annual credit limit of $5,000. Tip: Beginning in 2023, small employers can claim a credit based on employer contributions for the first five tax years, beginning with the year the plan is set up.

3. Stay below biz interest limit. Under the TCJA, the annual deduction for the net interest expense of a business, regardless of its form of ownership, is limited to 30% of its taxable income. However, for 2023, the 30% limit doesn’t apply to a qualified small business, which means one with average annual gross receipts of $29 million for the three prior tax years. Thus, you may be able to avoid this limit completely, especially if you can defer some gross receipts into 2024. Tip: If you’re still hit by the business interest deduction limit, carry forward the excess indefinitely until it’s used up.

4. Launch a new venture. Do you see a way to fill a business niche? If you seize the opportunity, take advantage of a special write-off of up to $5,000 for qualified startup expenses paid this year. This includes costs that would normally be deductible by an ongoing business. The $5,000 allowance is reduced dollar for dollar (but not below zero) by the cumulative amount of startup costs in excess of $50,000. Startup expenses that cannot be immediately deducted are amortized over 15 years. However, you must actually be “open for business” before 2024 to qualify for this tax break. Begin offering goods or services before January 1 to squeeze in under the wire.

5. Switch to cash-method accounting. Generally, small business owners prefer to use the simpler and more flexible cash method of accounting for tax purposes, instead of the accrual method of accounting. Thanks to the TCJA, a C corporation can use cash-method accounting for 2023 if its average annual receipts for the previous three years are $29 million or less. If your corporation is still using accrual-method accounting, ask your tax pro if the cash method is an option. Tip: Personal service corporations and most pass-through entities can use the cash method without regard to their gross receipts.

 6. Fix up the building. If your business is returning employees to its regular workplace, you might find the premises in worse shape than you thought. Tax consolation: Based on IRS guidance, you can currently deduct minor repairs to a business building, like fixing a leak or replacing a broken window. Conversely, the cost of most major improvements must be capitalized and depreciated over a number of years (generally 39 years for a nonresidential building). If you have the cash on hand, make minor repairs before the end of the year to increase your deductions for 2023 and reduce your tax bill. Tip: Separate repairs from capital improvements. The IRS may say that the entire cost of work done at the same time, including what would normally be considered repairs, constitutes an improvement under a general betterment plan.

7. Drive a better tax bargain. If you’re in the market for a new business-use vehicle at the end of the year, consider the federal income tax benefit. Under special rules, depreciation deductions for so-called “luxury cars” used for business driving are substantially restricted. But the TCJA provided a big boost to the annual limits. For example, if you acquire a new business car in 2023, the maximum first-year deduction for 100% business use is $12,200. In comparison, it was only $3,160 in 2017, before the TCJA was enacted. Tip: To top it off, you may be eligible for an extra $8,000 bonus depreciation deduction for a vehicle placed in service in 2023.

8. Do your research. Maybe you started a new business that relies heavily on technology. If certain requirements are met, you can claim a tax credit for research and development (R&D) costs incurred in 2023. The R&D credit generally equals 20% of the amount of qualified expenses over a base amount. Previously, a startup business could use up to $250,000 of research credits to offset payroll taxes if it had annual gross receipts of $5 million or less. The Inflation Reduction Act (IRA) doubled the cap to $500,000 after 2021. Tip: A business can elect a simplified 14% R&D credit. See your tax pro for details.

9. Issue qualified small biz stock. Your small business may need a cash injection at the end of the year. If it issues “qualified small business stock” (QSBS), you can exclude up to 100% of the taxable gain on a future sale of the QSBS, assuming applicable requirements are met. Perhaps the most important requirement is that you must have owned the stock for at least five years. Caveat: This tax break is only available for the stock of C corporations with no more than $50 million in assets.

10. Aim for targeted group workers. The holidays may be your busy season. Key point: The tax law allows you to claim the Work Opportunity Tax Credit (WOTC) for hiring disadvantaged workers from one of several targeted groups. Generally, the WOTC equals 40% of the firstyear wages of up to $6,000 per employee, for a maximum credit of $2,400. For disabled veterans, the credit can be claimed for the first $24,000 of wages, for a maximum credit of $9,600. There’s no limit on the number of credits your business can claim. Tip: The WOTC, which has expired and been resurrected multiple times in the past, is currently available through 2025.