Inflation adjustments boost estate, business benefits

The IRS has issued (Rev. Pro. 2022-38) its inflation adjustments for 2023, significantly increasing several business benefits and the amount taxpayers can pass to heirs tax-free. Tax laws require the IRS to adjust the dollar amounts of dozens of tax provisions each year to account for inflation. The cost-of-living adjustments for pension plan and retirement plan limits have not yet been released.

The inflation adjustments are some of the largest in recent years. The tax brackets were generally adjusted by rates of about 7% (in $50 increments), largely keeping in line with the rate of inflation in the U.S.—though still lower than the 8.2% year-over-year increase in the standard consumer price index (CPI) reported in September. For certain items—like tax bracket adjustments and the lifetime estate and gift tax exemption—this may, at least in part, be because the IRS now must use a new measure of inflation often called “chained CPI” to index adjustments, per the Tax Cuts and Jobs Act. Chained CPI is generally meant to reflect how consumers adjust behavior in response to price changes and typically results in shallower adjustments than the standard CPI.

The IRS adjusted several important thresholds for transfer tax planning, including:

• Unified lifetime estate and gift tax exemption: $12.92 million (up $900,000)
• Annual exclusion for gifts: $17,000 (up $1,000)
• Exemption for a child to whom the “kiddie tax” applies: $1,250 (up $100)

Several adjustments will benefit business owners:

• Loss limit: The amount of business losses individuals can be used against other income before being subject to the limit under Section 461(I) will rise to $289,000 (up $19,000) for single filers and $578,000 (up $38,000) for joint returns
• Cash method: The “gross receipts test” threshold for corporations to qualify for the cash method of accounting will rise to $29 million (up $2 million)
• Pass-through deduction: The taxable income thresholds when the exclusion for specified service activities and limit based on wages or tangible property begin to phase in for the Section 199A deduction for pass-through business increase will increase to:
  • Married filing jointly: $364,200 (up $24,100)
  • Married filing separately and other returns: $182,100 (up $12,050)
• Pass-through deduction: The amount that can be expensed under Section 179 will rise $1.16 million (up $80,000). This cap will be reduced by the amount of eligible property placed in service that exceeds $2.89 million (up $190,000). While Section 179 expensing has largely been eclipsed by 100% bonus depreciation, it may become more important in 2023 if bonus depreciation reverts to 80% as scheduled.

The IRS also has increased certain figures used to compute the Section 179D deduction for energy-efficient commercial buildings passed as part of the Inflation Reduction Act. Specifically, the “applicable dollar value” definition under Section 179D—a figure used to compute the maximum allowable deduction under Section 179D—will be increased to 54 cents for 2023 (up 4 cents from earlier this year), up to a maximum $1.07 (up 7 cents from earlier this year). These “applicable dollar value” amounts are multiplied by the square footage of a qualifying project—along with certain other additional calculations—to determine the allowable Section 179D deduction.

Similarly, the “applicable dollar values” bonus rates under Section 179D also will be increased for 2023. These bonus rates are used for projects meeting certain prevailing wage and apprenticeship requirements. The new starting bonus “applicable dollar values” will be $2.68 (up 18 cents from earlier this year), up to a maximum $5.36 (up 36 cents from earlier this year).

There are also a multitude of other impactful inflation adjustments. Important adjustments for individuals include:

• The alternative minimum tax exemption:
  • $126,500 for joint filers or surviving spouse filers (up $8,400)
  • $81,300 for unmarried individual filers, other than surviving spouses (up $5,400)
  • $63,250 for married filing separate filers (up $4,200)
  • $28,400 for estate and trust filers (up $1,900)
• The standard deduction:
  • $27,700 for joint filers (up $800)
  • $20,800 for heads of household (up $1,400)
  • $13,850 for single and married filing separate filers (up $900)
• Health flexible spending account annual cap: $3,050 (up $200)

The IRS also made several adjustments related to penalties:

• Minimum failure-to-file tax return penalty:
  • $485 (up $35) for failures under Section 6651(a)
  • $235 (up $15) for partnership return
  • $235 (up $15) for S corporation return
• Per-return penalties for failing to file a correct information return or payee statement:
  • $60 (up $10) for a corrected return filed within 30 days
  • $120 (up $10) for a corrected return filed by Aug. 1
  • $310 (up $20) for full failure
  • $630 (up $50) for intentional disregard
• Maximum penalties for failing to file correct information returns or payee statements:
  • More than $5 million in gross receipts
    • $630,500 (up $42,000) for correct returns filed within 30 days
    • $1,891,500 (up $125,500) for correct returns filed by Aug. 1
    • $3,783,000 (up $250 500) for full failures
  • $5 million or less in gross receipts
    • $220,500 (up $14,500) for correct returns filed within 30 days
    • $630,500 (up $42,000) for correct returns filed by Aug. 1
    • $1,261,000 (up $83,500) for full failures

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