As another year draws to a close, business owners are advised to assess their current tax situation and consider any steps that may be taken between now and year-end. As a reminder, more proposed legislation has been introduced in Congress. If another law featuring tax provisions is enacted before 2023, it may require revisions to any year end tax planning strategies you already have in place.
As we head into year-end, a business may benefit from one or more of three depreciation-based tax breaks: (1) the Section 179 deduction; (2) first-year “bonus” depreciation; and (3) regular depreciation.
YEAR-END MOVE: Place qualified property in service before the end of the year if you want to take advantage of these deductions in 2022. If your business does not start using the property before 2023, it is not eligible for these tax breaks.
YEAR-END MOVE: The first-year bonus depreciation deduction is scheduled to phase out over five years, beginning in 2023. Take full advantage while you can.
Under the CARES Act, an employer could defer its share of the Social Security tax portion of payroll taxes due for March 27, 2020, through December 31, 2020. The first half of the deferred amount was due at the end of 2021.
YEAR-END MOVE: Do not neglect to pay the second half of the deferred tax. This payment is due by January 3, 2023. If your business does not remit the payroll taxes in time, it will owe a penalty equal to 10% of the entire deferral amount. Furthermore, if it does not deposit the taxes within ten days of the IRS issuing a notice, the penalty is increased to 15%.
Note that the ARPA extended the payroll tax deferral break for wages paid from January 1, 2021 through December 31, 2021.
Tip: There is no payroll tax deferral for wages paid in 2022. So, your business must meet its regular payroll obligations in addition to paying any deferred tax that is due.
Previously, a business could deduct 50% of the cost of its qualified business entertainment expenses. However, the deduction for entertainment costs, including strictly social meals preceding or following a “substantial business discussion,” was eliminated by the TCJA, beginning in 2018.
Tip: Current law still permits deductions for certain business meals if you have the records needed to support your claims. Plus, your business may benefit from an enhanced deduction this year.
For starters, a business can deduct meal expenses of employees traveling away from home on business. In addition, the cost of food and beverages associated with entertainment such as sporting events and concerts may be deductible if the food and beverages are invoiced separately. The IRS has issued detailed regulations relating to these deductions.
Note that the cost of the food and beverages cannot be artificially inflated. Obtain the invoices from the appropriate venues.
YEAR-END MOVE: The ARPA doubled the usual 50% deduction to 100% for food and beverages provided by restaurants in 2021 and 2022. This tax break is not expected to be extended.
While expenses spent on making repairs are currently deductible, the cost of improvements to business property must be capitalized.
YEAR-END MOVE: When appropriate, complete minor repairs before the end of the year. The deductions can offset taxable income in 2022.
As a rule of thumb, a repair keeps property in efficient operating condition while an improvement prolongs the life of the property, enhances its value or adapts it to a different use. For example, fixing a broken window is a repair, but the addition of a new wing to a business building is treated as an improvement.
Tip: IRS regulations allow a qualified business to make a safe-harbor election to currently deduct costs relating to certain improvements.
The IRA resurrected the corporate alternative minimum tax (AMT) which was eliminated by the TCJA, although with some key differences. Effective for tax years beginning after 2022, the new corporate AMT equals 15% of the corporation’s adjusted financial statement income for the tax year. However, the tax only applies to corporations with average annual adjusted financial statement income in excess of $1 billion for the three prior tax years. This threshold is reduced to $100 million in the case of certain corporations with foreign parent entities.
The IRA also includes a new 1% excise tax on repurchases of the stock of publicly-traded corporations which occur after December 31, 2022.
Maxwell Locke & Ritter’s experienced tax professionals can help you with any questions you might have regarding the items above. We provide accounting and year end tax planning services for traditional construction companies and property owners. Contact us today if you need assistance.