2022 Year End Planning for Businesses
As we wrap up 2022, it’s important to take a closer look at your tax plans and discuss steps that can be taken to reduce taxes. Though there has been a lot of political attention to tax law changes, inflation, and environmental sustainability. Political compromise has led to smaller impacts on taxes this year.
To combat inflation, Congress passed the Inflation Reduction Act of 2022. This changed a wide range of tax laws including some additional tax incentives for you to consider. There are also several tax provisions that have expired or will soon expire. We continue to closely monitor any potential extensions or changes in tax legislation and will update you accordingly.
We’re here to help explain tax planning opportunities. Please contact us at your earliest convenience to discuss your situation so we can develop a customized plan. In the meantime, here’s a look at some issues impacting businesses to consider as we approach year-end.
Tammy’s Tax Tips for Businesses
Analysis of your financial statements: Let’s look at where your business is positioned with income and expenses to close out the tax year. This may mean getting caught up on your bookkeeping to have a better picture of where your tax situation stands. We can help you analyze your financial statements for tax savings and planning opportunities.
Time your income and expenses: When it comes to year-end tax reduction strategies, many businesses use cash-basis accounting, starting with the practice of accelerating deductions into the current tax year and deferring income into the next year.
- You can accelerate deductions by, for example, paying bills or employee bonuses due in 2023 before year-end and stocking up on supplies.
- Meanwhile, you can defer income by holding off on invoicing until late December or early January.
- You should consider this strategy if you do not expect to see significantly higher profits next year. If you think you will, it may be more efficient to flip the approach, accelerating income and pushing deductions into the future when they may be more valuable.
The Tax Cuts and Jobs Act (TCJA) increased Section 168(k) first-year bonus depreciation to 100% of the purchase price, through 2022. Beginning next year, the allowable deduction drops to 80% of the purchase price, then by an additional 20% each subsequent year until it evaporates altogether in 2027 (absent congressional action).
Bonus depreciation is subject to no limits or phaseouts in 2022. Bonus depreciation is available for many types of assets, including computer systems, software, vehicles, machinery, equipment, office furniture and qualified improvement property (generally, interior improvements to nonresidential property).
Under Section 179, you can deduct 100% of the purchase price of new and used eligible assets in the year you place them in service. Eligible assets include machinery, office and computer equipment, software, and certain business vehicles. The deduction is available for some improvements to nonresidential property.
The maximum Sec. 179 deduction for 2022 is $1.08 million and it begins phasing out on a dollar-for-dollar basis when your qualifying property purchases exceed $2.7 million.
Additionally, in some situations it may be better to have some depreciation available to offset your future income. If you have expiring net operating losses, charitable contributions or credit carryforwards that are affected by taxable income, careful planning is required.
Leverage your startup expenses: If you launched a new business this year, you might qualify for a limited deduction for certain costs.
- The IRS allows you to deduct up to $5,000 of startup costs and $5,000 of organizational costs (such as the costs of creating a partnership).
- The deduction is reduced by the amount by which your total startup or organizational costs exceed $50,000.
- The remaining costs are amortized.
- Eligible costs are:
- Costs that you could deduct if it were paid or incurred to operate an existing business in the same field.
- Examples include business analysis costs, advertisements for the business’s opening, travel and other costs related to lining up prospective distributors, suppliers or customers, and certain salaries, wages, and fees.
- Please keep in mind that costs must be paid or incurred before the active business begins.
Maximize your QBI deduction (QBI): Certain self-employed individuals and owners of pass-through entities (sole proprietors, partnerships, limited liability companies and S corporations) can deduct up to 20% of their qualified business income (QBI), subject to certain limitations based on W-2 wages paid, the unadjusted basis of qualified property and taxable income.
- The deduction, created by the Tax Cuts and Jobs Act (TCJA), is set to expire after 2025, absent congressional action.
- If the W-2 wage or property limits are capping the deduction, you could increase the deduction by increasing wages (for example, by accelerating the payment of bonuses) or accelerating the purchase of capital assets.
- These strategies have other consequences, for example higher payroll taxes, that should be considered with all other business factors before proceeding.
For Corporations: If you expect your closely held C Corporation and have a profitable year in 2022:
- Consider paying a year-end bonus to lower corporate tax liability. Wages are fully deductible by the corporation and will only be taxed once at the individual’s tax rate.
- Alternatively, there may be advantages to paying corporate dividends rather than wages to high-income taxpayers, even when double taxation is considered. At the individual level, qualified dividends are taxed at a maximum rate of 20%, while wages can
be taxed as high as 37% plus an additional 0.9% Medicare tax.
- Please discuss with us the most beneficial way to pay out corporate earnings and weigh all of the relevant factors such as your filing status and total taxable income.
Meals and Entertainment: As you enter the holiday season and have more social gatherings with your customers and employees, keep in mind the rules for business meal deductions.
- There is a 100% deduction (rather than the prior 50%) for expenses paid for food or beverages provided by a restaurant.
- This provision expires at the end of 2022 and the deductions for meals will revert to 50%, There continues to be no deduction available for entertainment expenses.
- Be sure to keep good records of expenditures on meals versus entertainment to determine which expenses are eligible to be deducted.
Energy tax credits: There are many tax incentives to encourage businesses to decrease their carbon footprint and become more environmentally sustainable. When certain criteria are met, businesses may be able to claim tax credits for items such as:
- Electricity produced from certain renewable sources (including geothermal, solar and wind facilities),
- Energy efficient home improvements (only available to eligible contractors and manufactured home manufacturers),
- Carbon oxide sequestration,
- Zero-emission nuclear power production,
- Alternate fuels,
- The rules are complex, and some elements of the law are not in effect until 2023, so careful research and planning now can be beneficial.
Additional tax planning considerations:
- Deferred self-employment or payroll taxes from 2020: If you deferred taxes from 2020, the second 50% payment is due by Dec. 31, 2022. The payment process is the same as the first 50% payment you should have made by Dec. 31, 2021.
- Employee retention credit (ERC): The ERC encouraged businesses to keep employees on their payroll during the pandemic. Although these credits relate to tax years 2020 and 2021, applying for these credits is still available. The IRS warned employers to be cautious of third parties taking improper positions related to ERC eligibility, as claiming the credit inaccurately can result in severe consequences. We can help you appropriately navigate the ERC.
- Charitable contributions: For tax year 2022, the maximum allowable contribution deduction is limited to 10% of a corporation’s taxable income (as compared to the temporary increase of 25% that was in effect last year).
- Partnership audit and adjustment rules: Changes to the partnership audit and adjustment rules have been in effect for a few years but we are still seeing some partnerships and their partners be blindsided at the unpleasant consequences that can arise from these rules. Careful planning today can help mitigate any unfavorable consequences to both the entity and the partners themselves. Also, be aware that even if your business isn’t a partnership, you’ll want to evaluate the effect these rules could have if you’ve invested in any partnership.
- IRS Forms K-2 and K-3: These new forms can require a lot of effort and potentially apply to even smaller entities. The IRS announced an additional exception to the requirement to complete and provide these forms. Let’s discuss this exception’s applicability to your situation and otherwise strategize to comply with this new and important requirement.
- Digital assets and virtual currency: The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to enhance its scrutiny in this area.
- State and local tax considerations: Businesses have numerous state and local tax matters to consider for compliance and planning purposes, including where income and sales are subject to tax, sourcing of income and the application of elective taxes that many states have for partnerships and S corporations. Let us help you with your state and local income tax needs, including sales/use and franchise taxes.
- Estimated tax payments: Let’s review estimated tax payments and assess any liquidity needs.
Year-end planning equals fewer surprises: Whether it’s working toward a tax-optimized business succession plan or getting answers to your tax planning questions, we’re here for you. Please contact our office today at 281-406-8984 to set up your year-end review. As always, planning ahead can help you minimize your tax bill and position you for greater success.
Tammy Mihail, CPA and team