Many states have enacted pass-through entity (PTE) taxes as an IRS-approved work-around to the $10,000 limitation on state and local tax deductions as part of the Tax Cuts and Jobs Act of 2017.1 Generally, a qualified PTE entity, such as an S corporation, partnership, or an LLC taxed as either of the two, can make an election to pay a PTE tax at the entity level on behalf of the owner’s/partner’s share of their qualified net income from the entity.
If the election is made and the PTE tax is paid, this will generate a tax deduction on the entity’s federal return, thereby reducing the taxable income reported on the owners/partners federal K1. Here’s an example of how it can work: If an S corporation has $1 million worth of income and the ultimate state tax is $60,000, that amount is considered an expense, so that the S corporation’s income for federal tax purposes becomes $940,000. Thus, the business owners are able to receive a tax deduction and ultimately pay less federal taxes, thanks to the PTE benefit. Additionally, the PTE paid will generate a tax credit to owners/partners that elect to participate in the PTE election and can be used to reduce their personal state income tax. It is necessary to check if your state has any limitations on utilizing these PTE credits. “Since 2017, more and more states have adopted these provisions,” Navani says. “If you’re an S corporation, be sure to speak with your tax professional about your state’s policies.”2
7. Set up — or add to — a retirement savings plan
Small business owners generally have several options for employer-sponsored retirement savings plans, including SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. The plans differ in the amount the employer and employee can contribute, the investment options available, and the ease and expense of setting them up, among other factors. Small business owners may also set up personal IRAs for themselves.
With any plan, contributions you make for yourself and your employees may be tax-deductible. Small businesses may also get a tax credit to help defray the cost of starting certain retirement plans. For calendar year taxpayers, you generally have until the due date, including extensions, of the small business’s tax return to contribute funds to a retirement plan. But some types of plans must be established before the end of this year, or earlier during this year, to get the tax deduction. Ask your tax advisor. To learn how much you can contribute to your retirement plan, refer to our annual contribution limits guide.
8. Consider equipment deductions and green energy tax credits
If you buy new or used equipment for your company and place it in service before December 31, 2023, you could be entitled to elect to expense the purchase and claim a federal income tax deduction for 2023. As the law currently stands, the benefit still exists for future years, adjusted for inflation. The aggregate cost of property that a taxpayer elects to treat as an expense cannot exceed $1,160,000. Because the deduction is intended for small businesses, its starts to phase out at spending amounts starting at $2.89 million, ending at $4.05 million. When planning a purchase, consider your timing carefully, Navani advises. “If you’ve had a challenging year financially and envision better results in the year to come, you might consider holding off that purchase until the start of the year, giving yourself a potential deduction for next year, when your tax bill could be higher.”
But you’ll have to weigh that choice against other incentives favoring investing in new equipment now, he adds. Bonus depreciation, set at 100% in 2020 during the pandemic, is steadily dropping each year—from 80% in 2023 to 60% in 2024. “So, if you’re on the fence about buying a new piece of equipment, it could make sense to buy it now and get it set up and running before the end of the year in order to get that 80%.”
Now may also be a time to consider green improvements for your business. The federal Inflation Reduction Act, signed into law in August 2022, includes nearly $400 billion for clean energy tax credits and other provisions aimed at combating climate change. These include potentially thousands of dollars in tax credits for buying new or used electric or hybrid clean vehicles, installing residential energy property, and other steps. Restrictions apply, so check with your tax advisor on which credits might be available to you, Navani suggests.