2023 Year End Guide for Businesses

As your trusted business & tax advisors, we want to provide a detailed update to start 2024. This covers most of the need-to-know federal and California tax law changes and current issues that may impact planning for this year:

The Short:

• Limits/maximums changed on a few items, details below. 
• Pass Through Entity Tax (PTE) – Must make election for 2024, make first payment before 6/15
• Statement of Information w/ CA Sec of State, due every 2 years 
• NEW: Corporate Transparency Act (CTA) requires reporting of Beneficial Ownership Information (BOI) of entities. Stay tuned for more info & deadline reminders. If your business was formed before 1/1/24, you have until 12/31/24 to report. We’ll send reminders and get more info after May, after we let everyone else test out the systems.
• 1099 Reportingdue before Jan 31st, see 1099 email. 
  • Let us know and get us your info by Jan 19th if you would like us to file for you!
• CA Paid Sick Leave increased from 24 hours to 40 hours for all employees.

The Long:

2023 Federal Tax Updates

• Increased standard mileage rate - Now 65.5 cents per mile, up from 58.5 cents in 2022. Remember this come tax time!
• New qualified small employer Health Reimbursement Arrangements (HRA) option - HRAs allow employers to reimburse employees tax-free for qualified medical expenses up to a maximum dollar amount.
• Expanded Small Business Healthcare Credits – Soon, more small firms can access Affordable Care Act's health insurance tax credit - expanding eligibility to more businesses.
• Larger Section 179 deduction limits - The maximum Section 179 deduction rises from$1.08 million to $1.16 million for eligible capital asset purchases.

Key Tax Court Cases

Smith v. Comm. (2022) - Holding company deducted 100% of aircraft expenses used by subsidiary. Court limited deduction to subsidiary's usage percentage. The ruling Impacted the treatment of shared assets between related companies.

• Jones v. Comm. (2022) - Court ruled that an LLC operating agreement contractually waived legal dissolution rights, mandating mediation. Operating agreements are extremely important, make sure you know what’s in yours.
• DKD Holdings LLC v Comm. (2021)- Court ruled that business credit card reward points received could constitute taxable business income.

CA Taxes: Electing Pass-through Tax Status

The California Electing Pass-through Entity Tax shifts state taxes on eligible entities from individual to entity level at 9.3%. This election is done to circumvent the federal limitation on state and local taxes but isn't necessarily a tax savings strategy for everyone. Let’s discuss eligibility and whether making the election for your LLC/S-corp/partnership could yield state tax savings.

Federal Taxes: New Loss Limitation for Pass-throughs

The CARES Act had temporarily repealed the excess business loss (EBL) limitation rule due to the impacts ofCOVID-19. This meant pass-through owners could fully utilize net losses from partnerships/S-corps to offset wage or investment income without limitation through tax year 2022.

However, under pre-CARES Act rules being reinstated starting in the 2023 tax year:

• Excess business losses (beyond$262,000 single or $524,000 joint) will be disallowed as personal deductions against non-business income sources like wages or portfolio dividends/interest.
• Disallowed excess losses are instead carried forward and treated as part of the taxpayer’s net operating loss (NOL) in subsequent years.

So for taxpayers above the thresholds with losses across multiple pass-through entities exceeding limits, personal taxable income cannot directly benefit from deducting more than$262K/$524K in aggregated business losses. But those carry unused excess amounts forward as an NOL asset against future business profits.

CA Statement of Information Reminder

Don’t forget - limited liability companies (LLCs), limited partnerships (LPs), limited liability partnerships(LLPs), and corporations in California must file an updated Statement of Information (Form SI-100) with the Secretary of State every two years, even if no business information or partner information has changed.

This simple biennial report identifies key details about the entity & deadlines are based on original incorporation/registration date. Reminder letters are sent by the SOS 60 days prior to the due date.

Stay compliant and avoid $250 penalty fees plus loss of legal entity status by keeping ownership/leadership details updated via this mandatory form every 2 years in California. Call us if any filing assistance needed!

R&D Credit Changes / Capitalization Rules

Prior to 2022 under pre-TCJA statutes, expenditures connected to the development or advancement of new intellectual property could be deducted in the current tax year along with claiming simultaneous R&D tax credits to maximize timely benefits. However, tax code revisions made under the 2017 Tax Cuts and Jobs Act (TCJA)fundamentally adjusted this preferential approach.

2022 changes introduced longer mandatory amortization treatment:

• Domestic R&D Expenses: Must now be amortized over 5 years, preventing full realization originally allowed upon outlay.
• Foreign R&D Expenses: Significantly extended 15-year recovery period now applies, delaying maximal credit utilization.

Impact on Credits: The longer amortization recovery periods now imposed on domestic (5 years) and foreign (15years) research activities restricts ability to enjoy the full realized benefit of claiming tax credits in tandem the same tax year costs are expended. 

The Corporate Transparency Act

The Corporate Transparency Act brings major new reporting rules with steep penalties for noncompliance. The aim of the legislation seeks to crack down on anonymous shell companies used for money laundering and other criminal activities by requiring robust disclosure of “beneficial owners” behind legal entity ownership structures. Mandatory reporting to FinCEN will impact a large majority of businesses in the US and abroad. 

However, as governing agencies continue formal CTA rulemaking, aspects of the reporting processes and deadlines remain subject to potential postponement or revision. Additionally, groups like the AICPA are currently petitioning for delayed adoption timelines around initial disclosures for existing entities and changes going forward. 

We will keep clients updated on any modifications during ongoing administrative and Congressional dialogues in the months ahead. But for now, here is a quick rundown of where things currently stand as of December 2023. 

Who is required to file?

Essentially, standard C-Corps, limited liability companies, and foreign entities conducting commercial activities in America are mandated to disclose details on individuals meeting ownership tests (over 25% equity stake).

Who is exempt from filing?

The following is a short list of exemptions from the CTA filing requirements according to the Department of the Treasury:

• Large Filers - Entities that already file reports broadly disclosing ownership details with the SEC, CFTC, or state regulators.
• Financial Institutions - Banks, credit unions,money services businesses, brokers/dealers, investment companies
• Various Entity Structures - Including but not limited to:
  • Public accounting firms
  • Public utilities
  • Nonprofits
  • Churches
  • Indian tribes
  • Governments & related entities

The commonality between all these CTA-exempt organizations is that the government already has strict filing requirements for them one way or another due to their unique industry or filing status requirements.

What are the current dead lines as they stand?

New corporations and LLCs established on or after January 1, 2024 will need to submit initial ownership statements to FinCEN disclosing controlling 25%+ beneficial owners no later than 30 days after initial formation. Meanwhile, entities created before January2024 have until January 1, 2025 to register current qualifying beneficial owners into the reporting system. After meeting initial disclosure requirements, all corporations and LLCs would then need to update any changes involving beneficial holders with 30 calendar days whenever control related events like mergers, sales, or acquisitions alter greater-than 25% indirect ownership interests.

What needs to be reported as a "qualified beneficial owner"?

The entity must identify & report beneficial owners (defined as having 25%+ equity or voting control) as well as the following information:

• Full legal names
• Birth date
• Address
• Unique ID # (SSN, passport, driver’s license)

Where is this information reported?

Current regulations indicate it will become accessible no later than January 1, 2024 based on the current compliance timelines calling for new entities formed on or after that date needing to file reports within 30 days of creation. 

As far as access, the expectation based on the law is that FinCEN will establish user accounts and authentication methods for entities to securely enter their CTA reporting after providing necessary identifying details and documentation during registration. From there, authorized reps would be responsible for logging in to input or update beneficial owner information.

What are the penalties for non-compliance?

The penalties associated with non-compliance are notably severe. Penalties of $500 per day with a cap of$10,000 exist for civil infractions and two years of imprisonment for any criminal activity, which is defined as willfully providing false or fraudulent information, or willfully failing to comply with any CTA reporting requirements. 

We would like to stress again that due to the many dynamic forces at play even while this law is coming into effect on Jan 1st, 2024, there are bound to be many further clarifications, pronouncements, changes, judicial rulings, and amendments to these requirements. We will keep you posted to any material changes that may impact our clients.