Below we have provided some information and created a list of actions based on current tax rules that can favorably impact your bottom line and your tax bill for 2022.
Timing the recognition of income and expenses can help businesses manage their tax liabilities. For some businesses, it may mean accelerating income and deferring expenses. For others, it may mean deferring income and accelerating expenses. Deciding on the optimum strategy for your business may require multi-year projections.
An entity’s business structure —C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship determines how business income is taxed and you should make sure that you have the right structure for your business.
Employee Retention Credit Penalty Relief
We helped many of our clients qualify for the Employee Retention Credit (ERC) which ended in September 2021.
The refunds from the ERC were reported in the year the credit is related to and in many cases, this credit was claimed on prior year amended returns. However, due to IRS delays in processing backlogged forms, some of you did not receive the refunds before your tax bill was due. To help, the IRS announced that taxpayers might qualify for the first-time penalty abatement program to remove penalties related to tax payments due on the amended returns.
Depreciation Tax Planning
Depreciation planning is a valuable strategy for taxpayers to manage their tax liability for years. Depreciation allows businesses to recover, as an expense, capital expenditures. This expense reduces taxable income and, consequently, the overall tax burden.
Businesses can depreciate 100% of certain property the year it is acquired. The 100% bonus depreciation is currently in effect until 2022. There will then be a phase-down of the bonus depreciation percentage by 20% each year from 2023 through 2026.
Tax Accounting Method Planning
Taxpayers often do not consider the benefits of accounting method planning because moving income or expense items into different periods generally does not result in permanent tax savings. However, in an environment with rate changes, permanent tax savings can be obtained. For example, accelerating depreciation deductions into years with higher tax rates could result in permanent savings. Now may be the time to look at property and depreciation methods to ensure maximum tax benefits.
Eligible businesses can use tax credits to lower their tax liabilities. Here are some of the tax credits available for 2022:
- Employer-Provided Child Care – 25% of expenses to buy, build, rehabilitate, or expand property that will be used as part of an employer’s childcare facility, plus 10% of the amount paid under a contract to provide childcare resource and referral services to employees, up to a maximum credit of $150,000 a year
- FICA Tip – Amount of employer’s FICA taxes paid on employee tips more than the amount treated as wages in satisfaction of minimum wage requirements (food and beverage establishments only)
- Small Employer Pension Plan Start-Up Costs – 50% of administration and retirement-related education expenses for the first three plan years, up to a maximum credit of $5,000 a year
- Research & Development – Generally, 20% of the amount by which qualified research expenses exceed a base amount
- Employer Wage Differential – 20% up to $20,000 of wage differential payments paid for each employee called to active military service
- Work Opportunity – For hiring members of targeted groups—40% of up to $6,000 of first-year wages paid per employee. This credit was extended by the Consolidated Appropriation Act, 2021, until December 31, 2025.
- Small Employer Health Insurance – Up to 50% of employer contributions for employee health insurance (available for two consecutive years only)
- Disabled Access – 50% of eligible access expenditures over $250 and not more than $10,250 (eligible small businesses only)
Section 199A and the 20% Pass-Through Deduction
Certain types of income (called “qualified business income”) is eligible for a 20% deduction. Qualified business income is defined as domestic, net business income and does not include wages or guaranteed payments and certain investment income. Pass-through entities like sole proprietorships, partnerships, and S corporations can all possibly generate qualified business income. The maximum income to receive the full deduction is $170,050 single and $340,100 married. For personal service businesses, the deduction phases out between income levels of $170,050 to $220,050 single and $340,100 to $440,100 married. This deduction is available whether one itemizes or uses the standard deduction.
Pass-through Entity Taxes (AB-150)
Under the Tax Cuts and Jobs Act, the deduction for state and local taxes for individuals itemizing deductions is limited to no more than $10,000 ($5,000 if married filing separately) for tax years 2018 through 2025. In response, California passed AB150, allowing certain pass-through entities (such as S corporations and partnerships), to be taxed at the entity level for state taxes and then deducting tax payments at the federal level. The owner can benefit since the income distributed has already been reduced by the state tax expense. We can analyze whether this election makes sense for you and your entity.
Optimize Your Business Retirement Plan
One of the best ways for business owners to slash their taxes is to establish and fully fund a retirement plan. This could be anything from a SEP IRA to a Solo 401(k) or a combination of a 401(k) with a Cash Balance Pension Plan. Businesses can potentially defer income taxes on hundreds of thousands of dollars annually.
Health Care Benefit Planning
For the 2022 plan year, a taxpayer that has 50 or more full-time equivalent employees could be subject to an excise tax, which could be as much as $2,750 per full-time employee, for failure to offer a health care plan that is minimum essential coverage to at least 95% of the full-time employees if at least one employee obtains subsidized coverage through a public health insurance exchange. The first 30 workers are excluded from this calculation. If the taxpayer does offer coverage but it is not adequate or is unaffordable, the excise tax could be $4,120 for each full-time employee who obtains subsidized coverage through an exchange.
Owners of closely held businesses may want to consider gifting an interest in the business (corporate stock or interests in family limited partnerships or LLCs). A taxpayer may take advantage of valuation discounts (marketability and minority discounts) and the 2022 gift tax exclusion of $16,000 per donee ($32,000 when gift-splitting) when gifting family business interests before year end.
These are just a few of the year-end steps that can be taken to save taxes. As skilled CPAs, we have the knowledge and experience to help you with your tax planning needs. Please contact us so we can tailor a particular plan that will work best for you.