When is the best time for year-end tax planning for a small business? Now that Labor Day has passed, it’s a good time to think about making moves that may help lower your small business taxes for this year and next. The standard year-end approach of deferring income and accelerating deductions to minimize taxes will likely produce the best results for most businesses, as will bunching deductible expenses into this year or next to maximize their tax value.
If you expect to be in a higher tax bracket next year, opposite strategies may produce better results. You could pull income into 2022 to be taxed at lower rates and defer deductible expenses until 2023 when they can be claimed to offset higher-taxed income.
Here are some other ideas that may help you save tax dollars if you act before year-end.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). If taxable income exceeds $340,100 for married couples filing jointly (half that amount for others), the deduction may be limited. Its limit is based on: whether the taxpayer is engaged in a service-type business (such as law, health, or consulting), 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.
Taxpayers may be able to salvage some or all of the QBI deduction by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout). You also may be able to increase the deduction by increasing W-2 wages before year-end. The rules are complex, so consult us before acting.
Cash vs. Accrual Accounting
More small businesses can use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2022, it’s satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $27 million. Not that long ago, it was only $5 million. Cash method taxpayers may find it easier to defer income by holding off billings until next year, paying bills early, or making certain prepayments.
Section 179 Deduction
Consider making expenditures that qualify for the Section 179 expensing option. For 2022, the expensing limit is $1.08 million, and the investment ceiling limit is $2.7 million. Expensing is generally available for most depreciable property (other than buildings), including equipment, off-the-shelf computer software, interior improvements to a building, HVAC, and security systems.
The high dollar ceilings mean that many small- and medium-sized businesses can currently deduct most or all of their outlays for machinery and equipment. The deduction isn’t prorated for the time an asset is in service during the year. Just place the eligible property in service by the last days of 2022, and you can claim a full deduction for the year.
Businesses can generally claim a 100% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used if purchased and placed in service this year. Again, the total write-off is available even if qualifying assets are in service for only a few days in 2022.
Consult with us for more ideas
These are just some year-end strategies that may help you save taxes. Contact us to tailor a plan that works for you.