by Len Green, CPA and John Wollenberg, CPA
In Thoroughbred racing, it's not over until the horse crosses the wire. The same is true with maximizing your tax deductions and minimizing your taxes. For those who think it is too late to save on your 2023 taxes, The Green Group is here to tell you, it's not!
With over 40 years of experience and our knowledge of the new tax laws, we are confident the following information will assist as you approach the 2023 home stretch.
Impact of Recent Tax Acts on the Horse Industry
- Recent Tax Acts contain favorable developments for depreciating and expensing yearlings, breeding stock, farm equipment and other property.
- Bonus Depreciation: Bonus depreciation allows a write-off of up to 80% for 2023 in the first year for yearlings, breeding stock and farm equipment. Used property can now also qualify. In 2024, the bonus depreciation drops to 60%.
- A few weeks still remain for 2023 asset additions with the potential benefit of the 80% write-off.
- IRC §179 Deduction: The maximum amount that may be expensed has been increased to $1,160,000. The phase-out threshold has been increased to $2,890,000 million.
- Farm Equipment: The useful life of new farm machinery and equipment is five years, while the useful life is seven years when you purchase used equipment.
- Racehorses: The pending Racehorse Cost Recovery Act of 2023 would make permanent three-year depreciation. If business equipment (or horses) are purchased before year-end, they may still qualify for tax benefits.
2023 Year-End Tax Planning Strategies
With uncertainty over whether tax law changes will be forthcoming after next year's election, year-end tax planning for 2023 is more important than ever.
Steps Available for Individual Taxpayers
- Capital Gains: If you have realized capital gains in 2023, along with unrealized losses, you might want to trigger those losses before year-end to offset your gains, thereby reducing your tax liability. On the flip side, if you have realized losses, consider taking some gains, as the deduction for capital losses is limited to $3,000 in any given year.
- Retirement Plan Alerts: Beginning in 2023, the Secure 2.0 Act raised the age that you must begin taking Required Minimum Distributions (RMDs) to age 73. Retirement plan account owners can delay taking their RMDs until the year in which they retire, unless they are a 5% owner of the business sponsoring the plan. There is no longer an age limit on making regular contributions to traditional or Roth IRAs. Contributions to a Keogh Plan or a one-person 401(k) Plan can be significant and save you substantial 2023 tax dollars if set up before December 31, 2023. A SEP-IRA is another flexible alternative. A SEP can be set up before the filing date of your 2023 tax return, yet still provide you with a 2023 deduction.
- Avoid the Underpayment of Estimated Tax Penalty: If you have not prepared a 2023 income tax projection, you should have your advisor do so. If your projection shows a balance due, request that a disproportionate amount of withholding be taken from your December paychecks, year-end bonus or retirement plan distribution, rather than paying a comparable significant amount with a fourth quarter estimate tax voucher. This withholding approach is more favorable than writing a check because taxes that are withheld in December are deemed “thrown back” and treated as evenly spread through the calendar year. This enables you to catch up on any shortfall and still avoid a penalty for the first three quarters.
- Business Losses: Of great importance, 2023 business losses are capped at $289,000 for single taxpayers and $578,000 for joint returns. Please take these loss limitations into consideration when preparing your 2023 income tax projections. Any losses in excess of these thresholds, become net operating loss carryovers to the following year.
- Maximize the Pass-Through Business Income Deduction: This tax saving deduction allows certain taxpayers to deduct 20% of their qualified business income. To maximize the deduction, you should take action steps to qualify for taxable income so it is below this new provision's phase-out thresholds.
Steps Available for Business Taxpayers
- Maximize Available Depreciation: Businesses should consider making expenditures that qualify for 80% first year bonus depreciation. Generally, both new and used depreciable assets are eligible. The full first year write-off is allowed even if the asset is purchased late in the year and put into use and even if the deduction gives rise to a taxable loss. Also, make sure you are taking bonus depreciation on all assets that are eligible. Many times assets are missed as to leasehold improvements, or horses purchased in overseas sales or horses put into training but not yet raced. An alternative is IRC §179 depreciation, where for 2023 the expense limit has been raised to $1,160,000 if the investment purchases do not exceed $2,890,000. Keep in mind that IRC §179 expensing cannot give rise to a loss.
- Qualified Business Income Deduction (QBID): Certain business owners may be entitled to a deduction of up to 20% of their qualified business income. You should take whatever steps are possible to keep your taxable income below that phase-out threshold. The rules are complex, so contact your tax advisor so they can help you maximize the use of the QBID.
- Active Business Requirements: Operate your horse activities in a business-like manner. We go so far as to recommend that you form a Limited Liability Company (LLC) before year-end and definitely have a separate checkbook. Keep a record of your horse business activities. Consult with someone knowledgeable in the horse business to ascertain if you meet some of the nine tests to “qualify” as “active” and, therefore, put yourself in the position to take “full advantage” of any tax losses you may incur.
- State Pass-Thru Entity Tax (PTET): The $10,000 limit on deduction of state income and local real estate taxes, commonly referred to as the SALT Cap, has prompted most states to allow pass-thru entities, such as partnerships and S corporations, to pay tax at the entity level. Although the rules are different in each state, the pass-thru entity generally receives a deduction and, as a result, passes less income to the partner or S corporation shareholder, thereby providing a “workaround” to the harsh SALT Cap.
Steps Available for Estate Planning
Estates of decedents who die during 2024 will have a basic exclusion amount of $13,610,000, increased from $12,920,000 for estate of decedents who died in 2023. Unless Congress takes action, this exclusion is set to go back to approximately $6,000,000 in 2026, at which point your ability to lessen estate taxes will be significantly reduced. We can help you plan for this change.
One Final Note
The IRS is examining a greater percentage of taxpayers whose businesses are reflecting losses.
Proper tax planning, strategy and utilization of professionals who know the horse industry are great tools to withstand any IRS scrutiny.
The Green Group welcomes the opportunity to discuss your 2023 year-end tax savings strategies with you by phone at (732) 634-5100 and ask for Len Green, CPA or John Wollenberg, CPA.