GJC Advisor 2023 Year-End Tax Planning BUSINESSES

GJC Advisor

2023 Year-End Tax Planning BUSINESSES

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Dear Friends,

We are pleased to present the 2023 Year-End Tax Planning Guide.

As businesses pursue transformational changes to their operational strategies, they need to consider the tax implications of those decisions from the outset. Whether you are considering supply chain shifts, pursuing M&A, implementing ESG strategies or adjusting your workforce, you need to model the tax impacts of those business decisions. Failure to consider tax in planning could result in unintended, adverse tax impacts or missed savings.

This issue is at the center of a total tax mindset. Tax professionals who understand the interplay between changing laws, economic forces and the tax implications of all types of business decisions will be well positioned to act as

strategic advisors and guide companies to success.

Tax planning is as essential as ever for businesses searching for ways to optimize cash flow by managing their long-term tax liabilities. This Year-End Tax Guide identifies tax strategies and considers how they may be influenced by recent administrative guidance and potential legislative changes that remain under consideration.

Reach out to us if you have any questions.

Have a safe and healthy Holiday Season!

GJC

Businesses Tax Planning Highlights

Tax Accounting Methods

A taxpayer’s tax accounting methods determine when income is recognized and costs are deducted for income tax purposes. Strategically adopting or changing tax accounting methods can provide opportunities to drive tax savings and increase cash flow. However, the rules covering the ability to use or change certain accounting methods are often complex, and the procedures for changing methods depend on the mechanism for receiving IRS consent — that is, whether the change is automatic or non-automatic. Many method changes require an application be filed with the IRS prior to the end of the year for which the change is requested.

Among others, taxpayers should consider the following tax accounting method implications and potential changes for 2023 and 2024, which are further discussed below.

Items taxpayers should review by year end:

Be mindful of the December 31^st deadline for non-automatic method changes
Verify eligibility to use small business taxpayer exceptions and evaluate method implications
Year-end clean-up Items: accelerate common deductions/losses, if appropriate
Revisit the de minimis book safe harbor for write-offs of tangible property
Consider methods implications of potential M&A transactions

Business Incentives & Tax Credits

Employee Retention Credit

The employee retention credit (ERC) is a refundable payroll tax credit for wages and health plan expenses paid or incurred by an employer (1) whose operations were either fully or partially suspended due to a COVID-19-related governmental order; or (2) that experienced a significant decline in gross receipts during the COVID-19 pandemic. The ERC has arguably been one of the most valuable provisions originating under the Coronavirus Aid, Relief, and Economic Security Act — the CARES Act — offering significant payroll tax relief for employers who kept employees on their payroll and continued providing health benefits during the COVID-19 pandemic.

Eligible employers can file a claim retroactively until the statute of limitations closes on April 15, 2024, for the 2020 ERC and April 15, 2025, for the 2021 ERC. Note that the U.S. government has repeatedly revised the requirements for U.S. taxpayers to claim the ERC since its initial codification into law. As a result, many eligible taxpayers have been uncertain as to whether they may properly claim this often-valuable tax credit.

Corporate and M&A

Corporations face a variety of unique tax rules and challenges – from the new alternative minimum tax and excise tax on stock repurchases to special limitations on deductions and losses, as well as complex tax rules when buying or selling a business. To minimize taxes payable, corporations should strive to identify and plan for tax issues before they arise. The following are some of the key developments and other areas to consider as corporations close tax year 2023 and begin 2024:

Corporate Alternative Minimum Tax Guidance: Notice 2023-64
Section 355 PLR Pilot Program Extension
IRS Denies Request for Extension to File Success-Based Fee Safe Harbor Election
Tax Considerations When Selling a Subsidiary
Intercompany Balance Cleanup
Legal Entity Rationalization
Sections 382 and 383 Limitations on Tax Attributes – Is Your Company Prepared?
Loss Limitations on S Corporation Shareholders
Stock Repurchase Excise Tax: Overview and Relevant Guidance

Customs and International Trade

As 2023 comes to a close, companies that import tangible merchandise into the U.S. should consider three topics: the Section 301 China tariffs, the Uyghur Forced Labor Prevention Act (UFLPA) and the country of origin rules. These measures can have a significant financial impact on businesses’ profitability given that customs duties are “above the line,” i.e., they are always cash. In addition, supply chain disruption and even closure can result from failure to comply with UFLPA.

Section 301: Product Exclusions and Sunset Review

In 2018, the U.S. government implemented additional tariffs on Chinese goods under Section 301 of the Tariff Act of 1930 in four separate “tranches” (lists) of products. The tariffs are triggered by the tariff classification code and are imposed in addition to the general ad valorem duty rates (and other U.S. trade remedies, e.g., Section 232 tariffs, antidumping and countervailing duties). Goods of Chinese origin are subject to an additional 25% or 7.5% duty, depending on the product list they fall under.

Financial Transactions

The tax rules dealing with financial transactions and instruments can be complicated, but failure to understand these rules and their application to your business’s transactions could result in negative tax consequences or forgone opportunities. As part of year-end planning and looking ahead to next year, there are a few steps that companies might want to take with respect to their financial transactions during the course of the year:

Consider Tax Implications of Debt Refinancing Transactions
Review Tax Hedging Identification and Documentation Processes
Consider Deductibility of Eligible Bad Debts

Consider Tax Implications of Debt Refinancing Transactions

Many companies refinanced existing indebtedness over the past year to lock-in current interest rates. Refinancing transactions that result in a “significant modification” of the debt under applicable regulations can have disparate tax consequences depending on the specific circumstances. Although the regulations provide relatively clear rules for determining when a modification is “significant,” the application of these rules is highly fact-dependent and frequently requires relatively complex calculations.

Global Employer Services

Utilizing Qualified Retirement Plan Enhancements to Improve Recruitment, Retention, and Employee Satisfaction

The SECURE 2.0 ACT of 2020 introduced over 90 changes to the federal rules governing workplace retirement plans. Many of the changes introduced by SECURE 2.0 are beneficial to employees and up to the discretion of the plan sponsor. Adopting some of these employee-favorable provisions might reassure employees that they can access their savings if needed before retirement, leading to overall increased employee savings and increased employee satisfaction.

Further guidance on many of the new provisions is needed, but every employer, whether for-profit or tax-exempt, that currently maintains a qualified retirement plan or is considering a future plan should evaluate their compliance with mandatory provisions and the cost benefit of adopting some of the many employee-friendly optional provisions.

Income Tax

What Lessons Can Corporate Tax Departments Take Into 2024?

In 2022, corporate tax departments that were already facing a persistent lack of resources had to adapt tax provision work and control frameworks to account for policy-related changes enacted over the last few years. With 2023 drawing to a close, now is a good time to revisit planning considerations – no matter when your tax year ends.

That is especially true, given the various important changes that are affecting, will affect, and will continue to affect tax functions. For instance, many Inflation Reduction Act rules took effect this year, and other changes, including some under OECD Pillar Two, are set to begin in 2024. Those policies, coupled with staffing and resource challenges, will make it even more important for tax departments to maintain and follow internal controls in the 2023 tax provision season.

Partnerships

The IRS in the past year has been actively challenging partnerships’ tax positions in court – from the valuation of granted profits interests to limited partner self-employment exemption claims and the structuring of leveraged partnership transactions. At the same time, the agency is dedicating to new funding and resources to examining partnerships.

These developments, along with some reporting and regulatory changes, mean there are a number of tax areas partnerships should be looking into as they plan for year end and the coming year:

Review Valuation of Granted Profits Interests, Partners’ Capital Accounts
Consider Active Limited Partners’ Potential Liability for Self-Employment Tax
Prepare for Expanded IRS Audit Focus on Partnerships
Review Structure of Leveraged Partnership Transactions, Application of Anti-Abuse Rules
Prepare for New Reporting on 2023 Form 1065 Schedule K-1
Evaluate Before Year End Expiration of Partnership Bottom-Dollar Guarantee Transition Rules

Real Estate

The structuring of real estate transactions can have significant tax implications, and new regulatory or statutory developments can change the calculation of how best to approach a transaction from a tax perspective. As part of year-end planning and looking ahead to the coming year, real estate businesses should review how current tax rules apply to their transactions and the effects of any changes to those rules – including the following:

Evaluate Structure and Tax Consequences of Real Estate Debt Workout Transactions
Prepare for Proposed Limit on Domestically Controlled REIT Status That Would Subject More Foreign Investors to U.S. Tax
Consider Electing Real Property Business Exception from Section 163(j) Business Interest Expense Limitation

State and Local Tax

With thousands of taxing jurisdictions, from school boards to counties and states, and many different types of taxes, state and local taxation is complex. Each tax type comes with its own set of rules — by jurisdiction — all of which require a different level of attention.

This article provides a high-level overview to help companies with 2023 year-end SALT planning considerations, and it provides guidance on how to hit the ground running in 2024.

Liquidity Events

Liquidity events take the form of IPOs; financings; sales of stock, assets, or businesses; and third-party investments. Those events involve different forms of transactions, often driven by business or federal tax considerations; unfortunately, and far too often, the SALT impact is ignored until the 11^th hour or later.

A liquidity event is not an occasion for surprises. When a taxpayer is contemplating any form of transaction, state and local taxes should not be overlooked.

Transfer Pricing

BEPS 2.0 and Intangible Property Planning

As of July 2023, 138 jurisdictions had signed on to the Organization for Economic Cooperation and Development (OECD) base erosion and profit shifting (BEPS) 2.0 framework aiming to ensure that multinational enterprises with group revenue of more than EUR 750 million pay a minimum corporate tax rate of 15.0%. While BEPS 1.0 led to many changes in rules in various jurisdictions to limit profit shifting, BEPS 2.0 is the largest coordinated effort to help address tax avoidance and bring international tax rules into alignment.

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