Tax Planning Opportunities in 2024

By Dave McGuire

For many businesses and individuals, 2024 has been a challenging year. Regardless of their financial situation, higher interest rates, inflation and uncertainties about changes in tax laws can create stress for business owners and their CPAs. Exploring the tax code for opportunities to save costs is one way to alleviate some of these economic pressures.

Taxpayers can take advantage of timing opportunities on their tax returns to alleviate economic pressures caused by increased interest rates and inflation. Timing opportunities involve adjusting when deductions are used to plan for changes. One of the main strategies for this is maximizing depreciation. Depreciation allows businesses to write off the cost of capital assets over time, such as buildings or equipment. Generally, the IRS allows buildings to be depreciated over 39 years and equipment over five or seven years. However, when purchasing a building, there are often assets within the building that function more like equipment than part of the building itself. For instance, the carpet in a building can be depreciated over the equipment lifespan, while the building continues to be depreciated over 39 years.

Businesses often conduct a cost segregation study to maximize depreciation deductions. This type of study identifies assets that can be reclassified from 39-year assets to shorter lives, creating a timing difference that accelerates deductions for the business in the current year. This helps offset taxable income and reduces the business’s tax liability. The resulting increased cash flow can be used to reinvest in the business, pay down debts or invest for future growth. This strategy is particularly valuable during periods of rising inflation and interest rates, as timing differences can be used to hedge against these threats.

In 2024, businesses have the opportunity to improve their cash flow and reinvest in their operations by exploring avenues beyond just depreciation. It’s crucial for businesses to stay updated on new legislative opportunities created by Congress and the President. In 2022, the President approved the Inflation Reduction Act of 2022 (IRA), which offers various tax credits and deductions for businesses of all kinds to enhance their facilities with energy-efficient systems. These credits and deductions encompass a wide range of benefits, focusing specifically on Section 48 credits and 179D deductions.

Section 48 is a longstanding area of tax law that saw significant expansion under the IRA. While most people associate Section 48 with tax credits for solar panels on businesses or specific wind turbines, it also covers geothermal systems, COGEN plants and other areas. These credits were increased to 30% for most systems under the IRA, with additional credits available for being in an “Energy Community” or utilizing domestic content. Meeting certain requirements allows businesses to receive full credit, which can result in 30%, 40% or even 50% credits for the installation of solar panels on their facilities. Coupled with the fact that the remaining basis is eligible for bonus depreciation, this means that businesses can potentially have up to 70% of the cost of solar installations covered by federal government tax incentives. For businesses seeking ways to alleviate economic pressures, this presents a significant benefit that is hard to ignore.

The Inflation Reduction Act not only made changes to solar credits but also increased the amount of deductions eligible for businesses to make energy efficiency upgrades. Nearly 20 years ago, the Energy Policy Act of 2005 established a section of tax law known as 179D, or the Energy Efficient Building Deduction. This deduction allowed businesses to deduct up to $1.80 per square foot for the installation of energy efficient systems. Under the IRA, this $1.80 per square foot was increased to $5 per square foot, indexed for inflation. To qualify for the full $5 per square foot, prevailing wage requirements must be met for the installation of the systems. This increased deduction can significantly reduce the cost of installing energy systems in a property. For example, a 100,000-square-foot facility undergoing renovation including new roofing, HVAC and other systems can deduct up to $500,000 in the first year if they meet the prevailing wage requirements, offsetting the cost of the upgrade.

It’s important to remember that tax planning is crucial in the current environment. Even for successful businesses in 2024, maximizing cash flow can help offset the uncertainty caused by increased interest rates, inflation and other external factors.

Partnering with leading CPA firms, McGuire Sponsel is a national specialty tax consulting firm that offers Fixed Assets, R&D Tax Credits, Global Business, and Location Advisory services. McGuire Sponsel strengthens CPA/client relationships by offering a trusted partnership for technical expertise across services that often fall outside traditional firm tax practices. Learn more at www. mcguiresponsel.com.