Your small- or medium-sized business may be eligible for some tax breaks that aren’t available to larger businesses. Here are some examples.
1. QBI deduction
For 2018 through 2025, the qualified business income (QBI) deduction is available to eligible individuals, trusts, and estates. It excludes C corporations or their shareholders.
The QBI deduction can be up to 20% of:
- QBI that you earn from a sole proprietorship or single-member limited liability company (LLC) that’s treated as a sole proprietorship for federal income tax purposes, plus
- QBI passed through from a pass-through business entity, meaning a partnership, LLC classified as a partnership for federal income tax purposes or S corporation.
Pass-through business entities report tax items to their owners. They take them into account on their owner-level returns. The QBI deduction rules are complex. In addition, the deduction will phase out at higher income levels.
2. Eligibility for cash-method accounting
Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. Moreover, this happens by timing the year in which you recognize taxable income. This also includes claiming deductions.
Under the cash method, you don’t have to recognize taxable income until receiving payment in cash. Additionally, you can write off deductible expenses when you pay them in cash or with a credit card.
Only “small” businesses are potentially eligible for the cash method. For this purpose, a small business includes one that has no more than $25 million of average annual gross receipts. This is based on the preceding three tax years. The ruling for this is under the current law. Then, adjust this limit annually for inflation. In addition, for tax years beginning in 2022, the limit is $27 million.
3. Section 179 deduction
The Sec. 179 first-year depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions. This applies in the first year they are placed in service. It is also available for all property.
For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable. Enhancements include:
Higher deduction. The Sec. 179 deduction has increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum is $1.08 million.
Liberalized phase-out. The threshold above which the maximum Sec. 179 deduction will phase out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.
The phase-out rule kicks in only if your additions of assets exceed the year’s threshold. These assets must be eligible for the year’s deduction. Then, if the threshold is exceeded, your maximum deduction is reduced dollar-for-dollar. This applies to the excess. Sec. 179 deductions are subject to other limitations.
Section 179 deductions may be limited. Those limitations don’t apply to first-year bonus depreciation deductions. For qualified assets, 100% first-year bonus depreciation is available. These must be placed in service in 2022. The first-year bonus depreciation percentages are scheduled to drop to 80% for qualified assets placed in service in 2023. In addition, they will continue to reduce until they reach 0% for 2028 and later years.
Contact us to determine if you’re taking advantage of all available tax breaks, including those that are available to small and large businesses alike.