The following are a few planning notes for the 2023 Tax Season.
Qualified Business Income Deduction
QBID, where owners of pass-through entities can receive a deduction of up to 20% of their business income, is still in place for this year. The thresholds for phase out have been adjusted for inflation and the restriction on Specified Service Businesses is also still in place.
Research & Development Expenses
Once again this year, qualified R&D Expenses cannot be fully deducted in the year incurred. They must be capitalized and depreciated as five year property.
This doesn’t affect the Research & Development Credit. Both the credit for increasing R&D Expenses as well as the one for payroll taxes on startups are still available. These can be done in conjunction with depreciating the normal R&D expenses.
Business Meals Only 50% Deductible
The 100% deduction for business meals occurring in a sit down restaurant is no longer available. The deduction reverts back to the normal 50% deduction. Proof for the deductibility of meals is what’s known as the “Newspaper Proof” and includes who was at the meal, what was the business purpose, when it occurred, where it occurred, and why it was initiated.
Just because you put a meal on a business credit card doesn’t mean that it can be deducted.
1099-K Reporting To Remain Over $20,000
Two years ago, the IRS was ordered via a new tax law, to lower the threshold on 1099-K reporting of internet type income from $20,000 to $600. They’ve postponed doing this once again.
The Service is now proposing to reduce the reporting threshold to $5,000 in 2024. This is yet another instance where Congress passes a law, and the Service then does whatever it wants.
Treatment of a Significant Decline In the Value of Cryptocurrency
Cryptocurrency markets have declined significantly in the past couple of years with the collapse of many market makers including FTX. In response, the IRS has advised taxpayers that they can’t take a loss deduction for the decline in value of a digital asset’s market value if they didn’t dispose of it or attempt to abandon it.
While some could argue that a cryptocurrency whose value has dropped to a fraction of a penny is worthless, the IRS has taken the position that as long as cryptocurrency was traded on at least one exchange, the possibility existed that its value could increase in the future and was therefore, not worthless.
Let me leave you with this…
I’ve had three conversations with retail clients who’ve all said that their sales so far in this holiday season are down.
We’ll see what the official numbers for Black Friday and Small Business Saturday look like in the next couple of days, but something tells me that the numbers won’t be encouraging.
We’ve already seen the employment numbers for holiday hires being off significantly from prior years. This tells us that most retailers aren’t expecting an exciting buying season given the fact that hiring is down.
Is this the beginning of what might become a recessionary period? I certainly hope not.
Time will tell.
Just because the financial markets have been on a tear for the last month, doesn’t mean that everything is going to be hunky dory next year. Historically, the stock market always rises when the Fed stops raising interest rates. Again using history as a guide, when the markets peak, the average is five months before the economy recesses.
What I’m actually asking all of you to be is cautious.
Horde your cash like a Viking King. Trim the fat. Be careful with new projects and as conservative as possible.
If we do go into a recessionary period next year, you’ll be glad you did. Not getting over extended at this point could save your business.
We’re all going to get through this. Let’s get through it together.
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