Written By: DHJJ
So much has happened since 2022, from pandemic-era rollbacks to new incentives for corporate sustainability projects. Building your tax planning strategies around them will not only reduce your corporate tax liability. It frees up capital for investments you need to meet business goals. Here are 7 essential areas you should focus on to develop effective tax planning strategies.
1. Recent Legislative Changes
The Inflation Reduction Act (IRA) of 2022 brought some significant changes for corporations. It instituted a 1% excise tax on corporate stock buybacks and a 15% alternative minimum tax (AMT) on some corporations. If you’re one of them, you will need to adjust estimates, mainly if you’re still basing them on temporary legislation from 2020/2021 that has since been rolled back. That said, while specific tax penalty relief has been rolled back, you may qualify for relief for 2019 and 2020 if you file for it by September 30, 2022.
The IRA also presents new opportunities for corporations to use renewable energy credits. If you’ve been putting off some green initiative improvements, now may be the time.
Understanding how state and local tax laws changed this year is essential. Effective state and local tax planning depends on it. In Illinois, Governor J.B. Pritzker signed the alternative income tax bill into law in late 2021, which may allow your corporation to choose a different taxing method.
Finally, if you pay International tax, evaluate any tax law changes in those countries and determine if you need International tax services to navigate increased tax complexity properly.
2. Review of Current Financial Situation
Analyze your financial statements. Review your income sources and expenses for this year to determine your taxable income and estimated payment requirements. Identify any fluctuations in revenue or unexpected expenses that may increase or reduce business tax liability.
Consider strategies to defer income or accelerate expenses when it makes sense for your financial situation.
Examine your balance sheet to gain insights into your assets and liabilities. Are there any opportunities to optimize your capital structure, reduce debt, or lower interest rates? Start planning now because these will impact your 2023 corporate tax planning strategy.
Don’t forget to review net operating losses and carryforwards. Proper management can significantly reduce your tax liability. You may find opportunities to carry forward these losses that offset taxable income for 2023 or 2024.
3. Utilizing Tax Credits, Deductions & Incentives
These are cornerstones of robust corporate tax planning. You shouldn’t be paying more taxes than you have to. So, research tax credits that may be specifically applicable to your industry or situation, such as tax credit opportunities for self-employment. Some credits may not be widely publicized. So, working with corporate tax planning services professionals who understand your industry and business is essential.
Maximizing the deductions you qualify for is vital, which can change from year to year. Do you see any business or tax advantages to spending more in a particular area, knowing you can deduct it?
And finally, incentives exist to encourage certain types of innovation, adoption, and investment in underserved communities. These can guide business investment decisions because the incentives will make certain investments more viable and lucrative than they would be otherwise.
4. Capital Expenditure Planning
Strategic capital expenditure planning can align your organization’s growth objectives with tax benefits. For example, you may be able to offset taxes this year to increase the cash flow you need now for capital investments.
To accomplish this, you’ll want to look closely at:
- Depreciation and amortization schedules
- Section 179 expenses
- Investment tax credits
5. Employee Compensation and Benefits
Your employees are your most valuable assets. How you compensate them can impact taxes and attract/retain top talent. But be sure you understand potential employee tax implications for fringe benefits before giving everyone a company car.
Perform a cost-benefit analysis, evaluate benefit use rates, and see if restructuring the package offers you tax and business benefits.
It’s also time to look at executive compensation to ensure you comply with regulations and aren’t unknowingly exceeding limits. If your organization offers employee stock options, ensure you understand how these are taxed both on your side and the employee’s. Proper structuring of stock option plans can optimize tax outcomes.
6. Estimated Tax Payments and Withholding
Managing your estimated tax payments and withholding is essential. Penalties and interest can add up if you don’t. At the same time, you don’t want to give the country or state a tax-free loan by overpaying either.
You have better uses for that money.
Assess employee withholdings as well. Discrepancies here can also lead to penalties. They can damage employer-employee trust, which leads to highly effective corporations.
7. Charitable Giving and Corporate Social Responsibility
As a corporation, you can deduct 10% of taxable income. This limit was raised to 25% during the pandemic but has now returned to its previous level. If you’re donating 25% in 2022, we commend you. But it’s crucial that your corporate tax planning so far this year wasn’t counting on being able to deduct all of that.
Regarding corporate social responsibility, aligning initiatives with your company values is vital. This isn’t just about tax write-offs or strengthening your brand’s reputation. Doing so also allows you to do the most good for something you care about. To do this, you’ll want to get your stakeholders involved in an initiative.
Build authentic partnerships with people making a difference in this cause and integrate social responsibility into your business model.
Prepare for Tax Season with DHJJ
Whether you’re an S-corp or C, you’ll get more out of tax planning strategies when you execute your strategy all year. You have many opportunities to make tax-advantageous decisions and improve your corporate financial health. At DHJJ, our team of experts helps corporations evaluate these 7 areas and more with robust audits and advisory services to support your business goals. Don’t miss out on tax reduction opportunities! Let’s talk about taxes.
