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Year-end Tax Planning for Business Owners

By: Tax Hotline
Fall 2022 (Vol. 40, No. 3)

Need to minimize income in 2022? if you use the cash method of accounting you 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.

Buy now - immediately deduct 100% of the cost of eligible property, such as machinery and equipment that is placed in service before January 1, 2023, after which it will be phased downward over four years.

Take advantage of Section 179 expensing. Elect to 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 December 31, 2022. (the Section 179 deduction cannot exceed net taxable business income) Taxpayers can also elect to include certain improvements made to nonresidential real property after the date the property was first placed in service.

Qualified Business Income Deduction. Many business taxpayers may be eligible for the qualified business income deduction. This deduction is worth up to 20 percent of qualified business income 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.

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 percent (35 percent for non-profits).

The Business Energy Investment Tax Credit was expanded and extended. As such, business energy investment tax credits worth up to 30 percent are still available for 2022. Business energy credits are available for Solar Water Heat, Solar Space Heat, Geothermal Electric, Solar Thermal Electric, Solar Thermal Process Heat, Solar Photovoltaics, Wind (All), Geothermal Heat Pumps, Municipal Solid Waste, Combined Heat & Power, Fuel Cells using Non-Renewable Fuels, Tidal, Wind (Small), Geothermal Direct-Use, Fuel Cells using Renewable Fuels, Microturbines, Lithium-ion, Offshore Wind.

Repairs. Where possible, end-of-year repairs and expenses should be deducted immediately rather than capitalized and depreciated. Small businesses lacking applicable financial statements 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.

Depreciation Limitations on Luxury, Passenger Automobiles, and Heavy Vehicles. If the taxpayer doesn’t claim bonus depreciation, the maximum allowable depreciation deduction for luxury vehicles in 2022 is $11,200 for the first year. For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. Heavy vehicles, including pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds, are treated as transportation equipment instead of passenger vehicles. As such, heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100 percent first-year bonus depreciation deduction as well.

Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2022.

Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.

Paid Family and Medical Leave Credit. A business tax credit is available for employers providing paid family and medical leave to qualifying employees through 2025. Employers must have a written policy that meets certain requirements and other conditions. The credit ranges from 12.5% to 25% of wages paid to qualifying employees for up to 12 weeks of family and medical leave per taxable year.

The Work Opportunity Tax Credit is available for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.