2022 Year-end Business Tax Planning Tips
If you're in business, you know that year-end is the time to start making moves to lower your business's taxes, both for this year and next. Tax planning is challenging enough, and this year is no exception. There is some uncertainty about what a lame-duck Congress might attempt before it adjourns, especially with control of the House changing party hands. For example, will tax extender legislation pass, reinstating tax provisions that have technically expired? That's anyone's guess!
Even so, the standard year-end approach of deferring income and accelerating deductions to minimize taxes continues to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value. If tax rates were expected to go up next year, the opposite approach could be warranted, but there doesn't seem at this time to be much political will to raise tax rates, so that risk seems to be minimal.
With that caveat, here are some actions that could save you tax dollars. Not all will apply to everyone, but likely every business can find one gem on the list.
• Taxpayers, other than C corporations, may still qualify for a deduction of up to 20% of their qualified business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly (about half that for others), the deduction may be limited if you are engaged in a service-type trade or business (think law, accounting, health, or consulting) by the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business.
The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.
If the threshold applies to your business, you may be able to salvage some or all the deduction, by deferring income or accelerating deductions to keep income under the 2022 dollar thresholds (or be subject to a smaller deduction phaseout).
• More small businesses can use the cash method of accounting (as opposed to accrual) than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2022 if, during a three-year testing period average annual gross receipts don't exceed $27 million (up from $26 million). Not that many years ago it was only $1 million.
Cash method taxpayers may find it easier to shift income, for example, by holding off billings until next year or accelerating expenses by paying bills early or making certain prepayments.
• Businesses should consider making expenditures that qualify for the "section 179" business property expensing option. For 2022 tax years, the federal expensing limit is $1,080,000 (up from $1,050,000), and the equipment purchase ceiling is raised to $2,700,000. In other words, the deduction begins to phase out on a dollar-for-dollar basis after $2,700,000 is spent in total by a business, meaning the entire deduction goes away once $3,780,000 in purchases is reached.
Expensing is generally available for most depreciable property, other than buildings, and for off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
Because this deduction is not prorated like normal depreciation based on the time the asset is in service during the year, this means that eligible purchases even in the last few days of the year can be fully expensed within the limits.
• Businesses also can claim the federal 100% bonus first-year depreciation deduction for machinery and equipment purchased and placed in service this year, and for qualified improvement property, described above in the discussion of the 179 deduction. The 100% bonus deduction is also available even if qualifying assets are in service for only a few days in 2022.
• Businesses may be able to take advantage of the "de minimis safe harbor election" to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren't required to be capitalized under the UNICAP rules.
To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, and where potentially increasing tax rates for 2023 aren't a concern, consider purchasing qualifying items before the end of 2022.
• A corporation (other than a large corporation) that anticipates a small net operating loss for 2022 but substantial net income in 2023 may find it worthwhile to accelerate just enough of its 2023 income (or to defer just enough of its 2022 deductions) to create a small amount of net income for 2022. This allows the corporation to base its 2023 estimated tax installments on the relatively small amount of income shown on its 2022 return, rather than having to pay estimated taxes based on 100% of its much larger 2023 taxable income.
• Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers.
Cash basis employers deduct bonuses in the year paid, so they can be timed for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within 2.5 months after the end of the employer's tax year for the deduction to be allowed in the earlier accrual year.
Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year-end to set the payment date later than the 2.5-month window or change the bonus plan's terms to make the bonus amount not determinable at year-end.
• Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of 2022 income is desired, consider disposing of a passive activity before year-end to take the suspended losses against 2022 income. If your 2023 tax rate is expected to be higher, however, holding off on disposing of the activity until 2023 might save more in future taxes.
So, there you have it. Here's wishing you merry tax planning!