2022 Year-End Planning for Businesses
2022 Year-End Planning for Businesses
Although this year included some major changes in the tax code as it relates to energy credits (mostly effective in 2023 and subsequent years), it was the first year since the passage of the Tax Cuts and Jobs Act of 2017 that planning for income taxes may feel more “normal” rather than like an introductory class to the latest rules, regulations, or stimulus programs.
Before the end of the tax year, you may consider the following actions as a means of reducing your exposure to income taxes in the current year on your business activity. Not all will apply to you but many may. Please contact us to discuss the potential benefit and your eligibility before taking action.
- Evaluate any additional states or local jurisdictions for potential income tax exposure. If you hired new staff, acquired tangible or intangible property, or on boarded a new customer in another state, consideration must be given to potential filing and tax payment requirements in those other jurisdictions. Many factors apply and each jurisdiction could measure the obligation to file and/or pay tax differently.
- Resident and nonresident state pass-through withholding or composite tax elections (partnerships or S corporations). Consider having the business make an election to pay an entity level state and/or local income tax obligation before the end of the year to create a deduction against federal taxable income and any applicable income tax credit for eligible members, partners, or shareholders of the entity.
- Reminder: Paying entity level taxes avoids the $10,000 state and local tax deductibility limitation individual taxpayers are subject to.
- Defer Income and Accelerate Deductions. The standard of deferring income into a subsequent year while concurrently accelerating deductions to defer income tax costs will continue to provide quantifiable benefits that can be accomplished quickly. WARNING: deferring income tax costs into a subsequent year does not always result in lower tax costs and may in fact increase your tax bill if the rates of taxation are higher in the subsequent year(s).
- Change in your method of accounting: Businesses can voluntarily elect to change their method of accounting overall or some other method of accounting for specific tax attributes (i.e. inventory). In general, the change is retroactive to the first day of the tax year and if resulting in a negative adjustment, deductible entirely in the year of change.
- Expenditures for capital investments: Businesses considering further investment into capital and operational assets in the coming year can benefit from completing the purchase and placing the property in service before year end to qualify for a first year 100% write off (168k bonus depreciation on new or used property). Note this write off changes to 80% starting in 2023. Additionally, first year accelerated expensing (179 depreciation) thresholds have been increased to $1,080,000 annually, phasing out at $2,700,000 in total assets placed in service in 2022. Reminder: Certain automobiles, real property improvements, and other types of capital investments may not be eligible property under either code section.
- Retirement contributions and new plan credits: Consider your ability to fund and to what level you can accrue future contributions to retirement accounts that qualify for a business deduction this year. If you haven’t done so already, consider establishing a retirement plan (401k, SEP IRA, Defined Benefit, etc.). Certain income tax credits for the establishment of new plans with automatic employee enrollment provisions can be helpful in offsetting the implementation costs. Consideration must be given to which plans may best suit your needs, the needs of the organization, and its employee(s).
- Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. In general, your ability to deduct losses from a partnership or S corporation is limited to your basis in your investment, including certain loans you have made or have guaranteed. If you anticipate losses in the current year, you may consider contributing cash or other assets or making a loan to your company to increase your basis sufficiently to deduct a business loss.
- 20% Qualified Business Income deduction. Individuals who are partners in a partnership or shareholders in an S Corporation, sole proprietors and, in some instances, those with rental activities may qualify for a deduction of 20% of their pass-through income. In some instances, use of retirement contributions and other year-end accruals can assist you in managing the applicable income limitations for deductibility.
- Remain an Eligible Small Business Taxpayer. In general, entities with annual gross receipts of less than $27,000,000 may be eligible for simplified accounting rules (cash method of accounting, no limitation on business interest expenses, and others). If revenues are near or exceed this amount, consideration may be needed to evaluate how the applicable tax provisions may impact tax cost, and opportunities to avoid these limitations on deductible expenses and compliance costs.
Other items to consider – Ask us about:
- Previously suspended passive or basis losses available to offset current year taxable income.
- Use of net operating losses from a current or prior year to maximize reductions in potentially taxable income before loss limitations that may apply.
- Expensing all eligible property under a de minimis safe harbor election for materials and supplies that are not required to be capitalized in your business. In most small businesses, this is less than $2,500 per unit of property but the threshold may vary.
- Consider accrual or payment of year-end bonuses. In order for accrued bonuses to be deductible, they must be paid in early 2023.
- Determine the company’s or individual partner’s/shareholder’s need to make estimated tax payments to avoid or minimize underpayment penalties.
- Consider allowances for employment or income tax credits for paid family and medical leave, and the hiring of “disadvantaged workers” (Work Opportunity Credit)
- Employee Retention Credits. Companies that have not explored their potential eligibility for 2020 or 2021should consider doing so. Be aware that amendments to employment and income tax returns may be required as a result.
- Consider dividends in lieu of bonuses to shareholders of corporations as a means of minimizing the cost of employment taxes incurred from bonus compensation.
Subsequent changes in tax law, code, regulations, regulatory guidance, or other precedent may affect the statements above and must be reviewed with your tax advisor before taking any action. Careful consideration and an accurate analysis of the income tax implications of any potential action is highly advised.