3 tax planning considerations for small and midsize businesses

With many small and midsize businesses paying taxes quarterly, last month may have been an unpleasant surprise, especially for those taking advantage of the R&D Tax Credit that has benefitted those in manufacturing or technology. After the tax credit expired in January, many held out hope that it would be renewed. At this point, though, there is little hope for renewal, and small and midsize businesses must now face back taxes and, even worse, underpayment penalties.

Recently, Vistage Chief Research Officer Joe Galvin spoke with Matt Garrett, Founder and CEO of TGG Accounting, about the change in the R&D Tax Credit, as well as some other tax policies set to expire that may impact your decision-making — and your finances — in the short and long term.

Learn more about what you should be thinking about as a CEO, and what immediate decisions you should discuss with your CPA to develop a longer-term strategy that mitigates risk.

1. R & D Tax Credits

In this section, Garrett explains that the R&D Tax Credit has been significantly reduced in 2023, which will affect businesses that previously received larger tax credits. He emphasized the importance of tax planning and consulting with CPAs to understand the impact on individual businesses.

The R&D Tax Credit was one issue Vistage members shared with analysts at the U.S. Chamber of Commerce during our exclusive Vistage on the Hill event. We asked them to share an update on their efforts and suggestions for SMBs.

The U.S. Chamber has been leading the effort on the R&D tax credit issue, sending various letters to Congress on the topic as well as publishing opinion pieces and commentary on the issue, Below are links to their efforts.

• Coalition Letter on Research & Development Taxes | U.S. Chamber of Commerce
• Natalie Kaddas: On Tax Day, small businesses call on Congress to help American manufacturing compete
• U.S. Chamber Letter on S. 866, the “American Innovation and Jobs Act,” and H.R. 2673, the “American Innovation and R&D Competitiveness Act”
• Congress Should Restore Immediate R&D Expensing for U.S. Businesses – Here’s Why

The U.S. Chamber also suggests that if your business is impacted by this issue, you should find out if your House Representative in Congress is a sponsor of H.R. 2673 and if your Senators are sponsors of S. 866. Thank each of those elected members (if they are sponsors) and demand sponsorship if they are not already on board.

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• Expensing R&D costs? IRS releases rules on 174
• Expensing R&D Costs – IRS releases 174 rules
• R&D (SRE) tax credits

2. Sunsetting Tax Policies

In this segment, Garrett stresses the importance of getting ahead of the Trump tax laws set to expire over the next 3 years, resulting in an increase in tax rates for businesses.

• Income Tax brackets change after 2025, which might result in a 50% increase in taxes in January 2026. Unwind old thinking: For cash-basis taxpayers, pay expenses in December and push off income to January to take advantage of the deferral. In 2025, you might want to pull in income and push expenses to 2026.
• Capital gains taxes will go back to old levels in 2026. If you’re thinking about selling, do it in the next 2 years to preserve the after-tax value.
• For estate taxes, prepare for the higher tax burden and consider the impact on cash flow and debt management.
• Rethink how you manage cash considering your short and long-term goals; evaluate the speed of transactions whether you are buying or selling.

3. Estate tax changes

In this segment, Garrett goes deeper into the changes in Estate Tax Exemption and the urgency to make decisions today to take advantage of this before it changes. The Estate Tax Exemption amount today is $25 million, then goes down to $13 million next year and then to $7 million the year after. If you are not ready to gift today, then it is time to set up a trust. Consider gifting the business into a trust today to avoid paying taxes that might ruin the business.

5 things to ask your CPA

While this might be overwhelming, here is a quick summary of what you should talk to your CPA about today regarding your tax planning strategy.

1. R & D Tax Credit: Understand the impact of Section 174, the items that will be capitalized over time that could impact your tax bracket, payments and estimated payments.
2. R & D Tax Credit: Go through your accounts and make sure you are allocating costs correctly between Section 41 and Section 174 and document a methodology to follow moving forward.
3. Income Tax: With Trump tax laws sunsetting, determine if income should be pulled into 2025 and start planning for that contingency.
4. Capital Gains Tax will probably go up after 2025, so if you are prepping your business for a sale, you might want to sell in 2025 to preserve your net after-tax earnings.
5. Estate Tax Exemption: Consider gifting this year to take advantage of the higher amount of the current estate tax exemption.

About Matt Garrett, Founder and CEO of TGG Accounting

For over 20 years, Matt Garrett has focused his career on the development of small business, personal finance and advanced tax and compensation issues. As a serial entrepreneur, Matt has founded and sold several businesses. Calling on his own experience as a business owner and his desire to reduce the business failure rate, he founded TGG Accounting in 2006 to provide small to medium-sized businesses with the vital financial infrastructure they need to succeed.

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