A number of end-of-year tax planning moves can help business owners to reduce their tax liability. Here are a few of them to consider.
Deferring income. Businesses using the cash method of accounting can defer income into 2023 by delaying end-of-year invoices so that payment is not received until 2023. Businesses using the accrual method can defer income by postponing the delivery of goods or services until January 2023.
Purchasing new business equipment. Businesses are allowed to immediately deduct 100% of the cost of eligible property, such as machinery and equipment that is placed in service after Sept. 27, 2017, and before Jan. 1, 2023, after which it will be phased downward over four years: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
The first-year 100% bonus depreciation deduction is available for qualifying assets even if they are placed in service for only a few days in 2022.
Section 179 expensing. Businesses should take advantage of Section 179 expensing this year whenever possible. In 2022, businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $1.08 million of the first $2.70 million of property placed in service by Dec. 31, 2022.
Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.70 million threshold and eliminated above amounts exceeding $3.78 million.
Qualified property. Qualified property is defined as property placed in service during the tax year and used predominantly (more than 50%) in your trade or business. Property placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.
Taxpayers can also elect to include certain improvements made to nonresidential real property after the date the property was first placed in service. Qualified improvement property refers to any improvement to a building’s interior; however, improvements do not qualify if they are attributable to the enlargement of the building, any elevator or escalator or the internal structural framework of the building.
Real estate qualified improvement property is eligible for immediate expensing, thanks to the CARES Act, which corrected an error in the Tax Cuts and Jobs Act.
Qualified business income deduction. Many business taxpayers — including owners of businesses operated through sole proprietorships, partnerships, and S corporations, as well as trusts and estates, may be eligible for the qualified business income. This deduction is worth up to 20% of qualified business income (QBI) from a qualified trade or business for tax years 2018 through 2025.
Your taxable income must be under $170,050 for single and head of household filers and $340,100 for married taxpayers filing joint returns to take advantage of the deduction in 2022.
The QBI is complex, and tax planning strategies can directly affect the amount of deduction, i.e., increase or reduce the dollar amount.
Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees with average annual wages of $56,000 in 2020 (indexed for inflation) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50% (35% for nonprofits).
Business Energy Investment Tax Credit (ITC). The Inflation Reduction Act of 2022 (IRA) expanded eligible technologies and extended the expiration date of the credit, in addition to several other changes. As such, business energy investment tax credits are still available, and businesses that want to take advantage of these tax credits (worth up to 30%) can still do so. Please call the office for assistance if you are a business owner eligible for the energy investment tax credit.
Business energy credits are available for the following technologies: solar water heat, solar space heat, geothermal electric, solar thermal electric, solar thermal process heat, solar photovoltaics, wind energy, geothermal heat pumps, municipal solid waste, combined heat and power, fuel cells using non-renewable fuels, tidal, wind (small), geothermal direct-use, fuel cells using renewable fuels, microturbines and lithium-ion batteries.
Repair regulations. Where possible, end-of-year repairs and expenses should be deducted immediately rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) can take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or invoice). Businesses with applicable financial statements can deduct $5,000. Small businesses with gross receipts of $10 million or less can also take advantage of the safe harbor for repairs, maintenance, and improvements to eligible buildings.
Retirement plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2022. Call today if you need help setting up a retirement plan.
Dividend planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
This column is for information only and is not intended as advice. Taxes are complex and mistakes can be costly. Seek the advice of a knowledgeable professional if you have questions.
Norman G. Grill is managing partner of Grill & Partners LLC, certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien.
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