We are seeing fewer unfavorable tax law changes for 2022 related to non-corporate small businesses. In fact, there are several favorable opportunities under the Tax Cuts and Jobs Act of 2017 (TCJA), the CARES Act and the Inflation Reduction Act (IRA) that you should discuss with your tax advisor.
Note: With an additional $80 billion allocated to the Internal Revenue Service for additional staffing and “tax enforcement activities,” tax planning is even more important to interpret the law carefully.
Here are six small business tax planning opportunities to consider:
1. Limitation on Excess Business Losses Extended
The IRA extends the limitation on excess business losses of non-corporate taxpayers by two more years, applying to taxable years beginning after December 31, 2022, and before January 1, 2029.
It may make sense for your business to record a larger loss on 2022 taxes if necessary or applicable before the loss limitation rules go into effect.
2. 100% First-Year Bonus Depreciation
Your business might be able to write off the entire cost of some or all of your 2022 asset additions on the 2022 federal income tax return and maybe on the state return, too.
If it makes practical sense, consider making additional acquisitions between now and year end. Contact us about the 100% bonus depreciation break and exactly what types of assets qualify. Under the TCJA, first-year bonus depreciation percentages for most eligible assets are scheduled to be reduced as follows:
- 80% for assets placed in service in calendar year 2023
- 60% for 2024
- 40% for 2025
- 20% for 2026
Keep in mind, if significant tax-rate increases are expected in future years, you could be better off forgoing 100% first-year bonus depreciation and instead depreciating newly acquired assets over several years. If tax rates go up, those future depreciation write-offs could be worth more than a current-year 100% write-off.
Fortunately, you have until the deadline for filing your current-year federal income tax return, including any extension, to decide whether to write off purchases immediately or depreciate them over time. If your business uses the calendar year for tax purposes, the extended filing deadline is October 16, 2023, for sole proprietorships and C corporations. The extended deadline is September 15, 2023, for partnerships, limited liability companies (LLCs) taxed as partnerships and S corporations. Extending your return may give you more flexibility to react to future tax developments or expectations about them.
3. Heavy SUV, Pickup or Van Write-Offs
The 100% bonus depreciation deal can have a hugely beneficial impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. That means the business-use percentage of the cost qualifies for 100% bonus depreciation if placed in service in calendar year 2022.
Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify this by looking at the manufacturer’s label that’s usually found on the inside edge of the driver’s side door where the door hinges meet the frame. If you’re considering buying an eligible vehicle, placing it in service before year-end could deliver a sizable write-off on this year’s return.
As part of your tax planning for fleet vehicles, consider this: the Inflation Reduction Act contains a tax credit specifically for used plug-in electric vehicles purchased after 2022. The tax credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. There are also price and income limitations. An eligible previously owned clean vehicle is one with a model year that is at least two years earlier than the calendar year when a taxpayer acquires it.
In addition, the IRA adds a new commercial clean vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The credit is a component of the general business credit.
4. QBI Deductions
This deduction based on an individual’s qualified business income (QBI) can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.
You can also claim the QBI deduction for up to 20% of qualified REIT dividends and up to 20% of qualified income from publicly traded partnerships.
Because of the income limitations on the QBI deduction, year-end tax planning moves can increase or decrease your allowable QBI deduction. For instance, year-end moves that reduce this year’s taxable income — such as claiming 100% bonus depreciation deductions or making deductible retirement plan contributions — can reduce this year’s allowable QBI deduction.
5. Qualified Small Business Payroll Tax Credit for Research
Another provision in the IRA would boost the payroll tax credit for increasing research activities. Currently, a qualified small business (QSB) may elect to take part of the research credit as a payroll tax credit against its employer FICA tax liability. A QSB must have gross receipts of less than $5 million and meet other requirements. An eligible business with qualifying research expenses can then opt to apply up to $250,000 of its research credit against its payroll tax liability.
Under the IRA, beginning after December 31, 2022, a QSB can choose to apply another $250,000 in qualifying research expenses (for a total of $500,000) against its payroll tax liability. Many restrictions apply, and the R&D tax credit is under close scrutiny by the IRS, so beware of firms that promise an easy credit for research.
6. Tax-Favored Retirement Plans
If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions.
For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for the 2022 tax year. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000).
Other small business retirement plan options include:
- 401(k) plans, which can even be set up for just one person (called solo 401(k)s),
- Defined benefit pension plans, and
Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.
Important: The SECURE Act doesn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.
Timing of Business Income Reporting and Deductions
If you conduct your business using a pass-through entity, evaluate whether you will be in the same or lower federal income tax bracket in 2023. If so, use the traditional year-end strategy of deferring taxable income into next year while accelerating deductible expenditures. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2022 until 2023.
On the other hand, if you expect to be in a higher tax bracket in 2023, take the opposite approach. If possible, accelerate income into this year and postpone deductible expenditures until 2023. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.
If you have questions about tax planning for your small business, talk to your tax team here at LvHJ.