Looking Forward to 2023: A Recap of 2022 for Professional Services Firms

Looking Forward to 2023: A Recap of 2022 for Professional Services Firms

With 2023 officially in full swing, we thought it would be helpful to look back at 2022’s trends, such as taxes, tax advantages and inflation. As you prepare for 2023, let’s look at a few strategies that may save you money on your taxes amid inflation and keep your assets safe.

Leveraging Tax Incentives

The Research and Development (R&D) Tax Credit

Changes to the Research and Development (R&D) Tax Credit went into effect for the 2022 tax year, making it a good time for CFOs to evaluate whether your company is maximizing this opportunity to reduce its income tax liabilities. To help you determine if and how your business may be able to benefit from this opportunity, here are four key things to know:

1. Professional services firms can qualify for the R&D Tax Credit.

Professional services firms, such as architectural, engineering and computer software businesses, that are investing in product or process improvement can qualify for the federal R&D Tax Credit, which is a dollar-for-dollar offset against regular income tax liability. This can be used to hire additional employees, invest in new equipment or fund other business initiatives. Any company that invests in product or process improvement can qualify, and the improvements simply need to be new to your firm, not the industry. This includes research and development activities that contribute to innovation in design or infrastructure, new or improved software platforms, specialized technologies or alternative material testing.

2. Qualification is based on a four-part test.

The credit is designed to incentivize certain research activities by reducing your company’s liabilities. These R&D activities must meet a four-part test defined by the IRS:

  • Permitted purpose
  • Elimination of uncertainty
  • Process of experimentation
  • Technological in nature

The credit equals a defined percentage of qualified research expenses in excess of a base amount, including the salaries of employees and supervisors engaged in the research, as well as research-related supplies, computer expenses, outside consultants, engineers or programmers.

3. Thorough documentation is required.

Taking effect in 2022, companies must include a thorough breakdown of all business components related to the credit claim, identifying the research activities and the employees responsible for each activity. In addition, the total cost of employee wages, qualified supplies and contracted research must be submitted.

4. Deductions for R&D expenses must be amortized.

Finally, for taxable years that began after Dec. 31, 2021, R&D expenses not reduced by R&D credits taken must be amortized over five years for domestic claims and 15 years for foreign research. Previously, businesses could immediately deduct these types of expenses in year one. It’s worth noting that an effort has been underway asking Congress to repeal the amortization requirement for R&D expenses to increase U.S. competitiveness.

Professional services firms of all sizes are eligible to take advantage of the dollar-for-dollar savings available through the R&D Tax Credit if they invest in the development or improvement of products, processes or technology.

The Green Energy Tax Incentive

Signed into law in August 2022, the Inflation Reduction Act (IRA) introduced a higher energy tax deduction, making going green a more lucrative option. In an effort to improve energy efficiency and reduce emissions, the recent passage of the IRA includes provisions that could significantly boost climate actions.

Though the IRA features numerous tax incentives for renewable energy and clean energy investments, one of those incentives was a significant change to the Commercial Buildings Energy-Efficiency Tax Deduction (Section 179D), incentivizing builders and building designers to create energy-efficient buildings.

Section 179D was originally introduced for the purpose of helping firms reduce their tax burden while also making energy-efficient investments. The new changes from the IRA increase eligibility for larger deductions and make the tax credit available to a wider range of taxpayers looking to decrease their carbon footprints. The IRA modifications to the deduction include the following:

  • Increasing the maximum tax deduction from $1.88 in 2022 to $5.00 per square foot in 2023
  • Lowering the required minimum savings in total annual energy and power costs from 50% to a 25% reduction
  • Allowing buildings to qualify for a partial deduction of $0.60 per square foot for the efficiency of each lighting, HVAC and building envelope
  • Higher deduction for taxpayers that meet prevailing wage and apprenticeship requirements
  • Allowing tax-exempt entities to assign the deduction to the architect, engineer or contractor that performs design-build services for government-owned buildings
  • Removing the lifetime limit, allowing the 179D deduction to be taken every 3 to 4 tax years

These changes to 179D allow companies to accelerate deductions for the costs of building and improvements, providing immediate cash flow relief.

Tax Nexus

For most of the 20th century, nexus was understood to be a physical connection with a state. If a company had a physical location or employee in a state, the state could impose income or sales tax. As internet commerce took off, states quickly realized they were losing tax revenues because remote sellers weren't collecting sales tax in states where they didn't have a physical presence. That’s where nexus comes in.

As many employees continue to work remotely, states are looking at compliance and starting to enact so-called “convenience-of-employer” rules. This specifies that employees working for a firm located in one state but performing business in another are subject to the tax laws of the employer's state and may be subject to double taxation. This can be a significant financial burden for remote employees, so be transparent with employees about their tax obligations from the outset and assist employees affected by them.

It's also important that CFOs evaluate tax nexus exposure regularly. In most cases, this means relying on help from a trusted advisor who can help evaluate your nexus exposure and create a compliance plan. If your firm employs workers in multiple states, you likely have sales and income tax nexus in numerous jurisdictions. Therefore, knowing where your services are sold and where your employees are located is crucial — especially when it comes to audit scrutiny. It's crucial to start this process before registering in the state because once registered you may not be eligible to negotiate prior liabilities.

Reducing Liability with Cash Balance Plans

Sometimes called a “hybrid plan,” a cash balance plan combines higher annual contribution amounts and interest credits with the higher maximum benefit and deduction limits available to defined benefit plans. Today, cash balance plans represent the fastest-growing segment of the retirement plan market, with much of the growth fueled by small business owners and professional services firms that value the plan’s increased financial flexibility and opportunity to reduce taxable income.

For businesses, the tax deductions go beyond what’s available with a 401(k) plan. The funds contributed to a cash balance plan are tax deductible in the first year the plan is implemented and are considered an “above the line” deduction that reduces the business’ taxable income dollar for dollar. The professional services industry experts at CBIZ can help you explore whether a cash balance plan fits your specific business and retirement goals.

Combatting Inflation in Your Operations

In today's economy, many CFOs are looking closely at how to reduce costs. With office space being one of the most significant expenses for businesses, companies can save millions of dollars each year by reducing their footprint. Let's take a look at a few options:

  • Renegotiated leases: Using the details of your newly reimagined office space, you can negotiate with your landlord to obtain the most attractive economic deal possible, depending on when your lease expires.
  • Blend-and-extend leases: If you have less than two years left on your lease and want to remain in your current space or downsize, you may approach your landlord about a blend-and-extend lease. This type of lease allows the tenant to extend the terms of the lease while also reducing the monthly payments.
  • Subleases: If your firm has extra square footage, find another business to take over the excess area until the lease ends. This can be a great way to bring in some extra income and make use of space that would otherwise go unused.
  • Sell: If your firm owns the space it occupies, selling the property may be a viable option — especially if you've owned it for an extended period and can stand to make a profit. You could also negotiate a sale-leaseback, allowing you to retain the right to stay on as a tenant.
  • Relocate: No matter if your company owns or leases, moving to a more affordable space could be a sensible option. It must be done thoughtfully, as it will directly impact your employees. Keep all employees updated throughout your decision process and consider whether taxes, productivity and morale will be negatively affected by a relocation.

Final Comments

A possible economic slowdown can be a daunting prospect for any CFO. Implementing innovative solutions and benefits can help your business navigate the recessionary concerns of 2023 and enable your company to thrive. If you don’t know where to start, our dedicated professional services team at CBIZ can help.


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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ). This publication is protected by U.S. and international copyright laws and treaties. Material contained in this publication is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their organization.

Looking Forward to 2023: A Recap of 2022 for Professional Services Firmshttps://www.cbiz.com/Portals/0/Images/ProServ-January-2023-article.jpg?ver=N_p2QD5xtbiWXTbKSIOZJg%3d%3dWith 2023 officially in full swing, we thought it would be helpful to look back at 2022’s trends, such as taxes, tax advantages and inflation.2023-01-30T17:00:00-05:00With 2023 officially in full swing, we thought it would be helpful to look back at 2022’s trends, such as taxes, tax advantages and inflation.Planning & Tax MinimizationProfessional ServicesR&D Tax CreditsState & Local TaxTax ControversyYes