MLR

2022 Year-End Tax Planning for Business Owners

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.

Depreciation-Based Deductions

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.

  1. Section 179 deduction: Under Section 179 of the tax code, a business may “expense” (i.e., currently deduct) the cost of qualified property placed in service anytime during the year. The maximum annual deduction is phased out on a dollar-for-dollar basis above a specified threshold for assets placed in service during the year. For 2022, the deduction limit and phase-out threshold are $1,080,000 and $2,700,000, respectively (and the recently announced amounts for 2023 are $1,160,000 and $2,890,000). Be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2022.
  2. First-year bonus depreciation: The TCJA authorized a 100% first-year bonus depreciation deduction through 2022. This includes used, as well as new, property.
  3. Regular depreciation: If any remaining acquisition cost remains, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).

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.

Payroll Tax Deferrals

 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.

Business Meals

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.

Business Repairs

 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.

Corporate Minimum Tax

 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.

Miscellaneous
  • Consider hiring workers from certain target groups eligible for the Work Opportunity Tax Credit (WOTC). Generally, the WOTC is 40% of first-year wages of up to $6,000, for a maximum $2,400 credit per qualified worker.
  • Employee Retention Tax Credit (ERTC). It’s not too late for eligible employers to claim ERTC tax credits. If your business suffered a decline in gross revenues in 2020 or 2021 or had its operations fully or partially suspended, you should consider contacting your payroll or other service provider to determine if you may be eligible for the ERTC.
  • The TCJA required that any research and development costs incurred after 2021 would have to be amortized ratably over five years rather than deducted in the year the costs are incurred (or amortized at the election of the taxpayer subject to specific requirements), which would impact any costs incurred in 2022. While there have been proposals to extend the direct expensing of these costs to years beyond 2021 and retroactive extension may still be a possibility, there is nothing currently proposed.
  • The IRC Section 163(j) limitation applies to all business interest payments for businesses with gross receipts in excess of $25 million ($27 million in 2022, as indexed for inflation). Prior to 2022, depreciation and amortization expense was allowed as an addback in the calculation used for purposes of the 30% of adjusted taxable income limitation on deductible business interest, thereby allowing many businesses to avoid the business interest expense limitation under 163(j).  Beginning in 2022 however, depreciation and amortization expense will no longer be allowed as an addback and, as a result, more businesses will be impacted by the 163(j) limitation.
  • Stock up on routine supplies (especially if they are in high demand). If you buy the supplies in 2022, they are deductible in 2022—even if they are not used until 2023.
  • Maximize the qualified business interest (QBI) deduction for pass-through entities and self-employed individuals. Note that special rules apply if you are in a “specified service trade or business” (SSTB).
  • If you pay year-end bonuses to employees in 2023, the amounts are generally deductible by the company and taxable to the employees in 2023. But a calendar-year company operating on the accrual basis may be able to deduct bonuses paid as late as March 15, 2023, on its 2022 return if the bonuses are not contingent upon any post year-end events.
  • If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $25,000. The “luxury car” limits do not apply to certain heavy-duty vehicles.
  • Keep records of collection efforts (e.g., phone calls, emails and dunning letters) to prove debts are worthless. This may allow you to claim a bad debt deduction.
We Are Here to Help

Maxwell Locke & Ritter’s experienced tax professionals can help you with any questions you might have regarding the items above.  Contact us today if you need assistance.

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