It may seem early to talk about year-end tax planning, but with only roughly sixty days left in 2022, it’s important to take action now to favorably impact your tax bill this year, and to put yourself in good financial footing for the year ahead.
End-of-year taxes are a significant part of tax planning for any business. You can dramatically affect the amount of tax you owe at year’s end depending on the amount of planning and preparation you put into business tax management. Proper planning can help you take advantage of timely tax breaks. Here are several strategies to consider as you plan for 2022 business taxes.
The Work Opportunity Tax Credit
We are in a tough labor market and it’s hard to attract and retain employees. The Work Opportunity Tax Credit can help. It is a federal income tax credit incentive provided to private sector employers. An employer may be eligible for WOTC when they hire from certain target groups of job seekers who face employment barriers. The WOTC tax credit is a one-time tax credit for each new hire – and there is no limit to the number of new hires who can qualify an employer for a tax credit. The credit applies to hiring employees from targeted groups such as:
- Qualified IV-A recipients
- Veterans
- Ex-felons
- Designated community residents (DCRs)
- Summer youth employees
- Vocational rehabilitation referrals
- Supplement security income (SSI) recipients
- Supplemental Nutrition Assistant Program (SNAP) recipients
- Qualified long-term unemployment recipients 1
Employee Bonuses
At year’s end, some businesses may choose to provide end-of-year bonuses or retirement contributions to their employees, taking advantage of a tax break on these funds. If your business doesn’t currently offer a retirement plan, certain tax breaks exist to make this more financially appealing. As well, bonuses are deductible to your business, in the tax category of “payments to employees.” If you pay an employee a bonus in a separate check from their regular pay, you can calculate the federal income tax withholding in one of two different ways:
- You can withhold a flat 22%.
- You can add the bonus to the employee’s regular pay and withhold as if the total were a single payment.
Budgeting for Raises
Now is the time to be thinking about your budget for 2023 payroll. Companies, on average, are budgeting a 4.1% salary increase for 2023, just above this year’s average 4% increase. The 2022 and 2023 salary increases are the largest since the Great Recession of 2008. 2 Additionally, there is going to now be higher social security wage base come 2023, which may increase your payroll cost. All these increases should be planned for in your year-end tax planning efforts. Additionally, starting Jan. 1, 2023, the maximum earnings subject to the Social Security payroll tax will increase by nearly 9 percent to $160,200—up from the $147,000 maximum for 2022, the Social Security Administration (SSA) recently announced. The IRS also raised the top amounts of all seven federal tax brackets for 2023, which could increase the paychecks of many employees by taxing more of their earnings at lower rates and influence employee decisions on paycheck withholding amounts.
Qualified Business Income Deduction
The qualified business income (QBI) deduction is a tax deduction that lets specific self-employed individuals and small business owners subtract up to 20% of their qualified business income from their taxes. If you have business earnings and your total taxable income is less than $170,050 (or $340,100 for joint filers) in 2022, good news! You might be eligible for the full QBI deduction. A tax advisor can help you understand exactly what income counts, who qualifies and how to claim this deduction.
Collect On Outstanding Invoices
Review any outstanding accounts receivables and try to collect whatever is outstanding. Certain aged, unpaid accounts may be eligible to use as a write-off on your taxes. This is done when an amount owed by a customer has not been paid and is expected to remain unpaid. By writing off this debt, you can reduce your company’s tax burden for the current tax year. To ensure this process is properly handled, it’s best to address bad debts well before year-end. Try to contact customers who have outstanding invoices and incentivize them to make good on payment.
Buying or Leasing Equipment
Passing of the Tax Cuts and Job Act has created many new tax rules for small businesses. This includes the decision as to whether to lease or buy equipment or other fixed assets. There is no actual universal “right” choice between buying or leasing. However, many businesses that formerly leased assets are now deciding to purchase them. From a cash flow perspective, leasing can be more attractive than buying. Plus, leasing does provide some tax benefits. This includes payments for leases generally being tax deductible as “ordinary and necessary” business expenses. Now, many businesses will be able to write-off the full cost of most equipment in the year of its purchase. Any remainder is eligible for regular depreciation deductions over the corresponding IRS schedules.
“Green” Business Tax Credit
Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one or many to operate your business, you may be eligible for a federal tax break.
The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles, including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500. One of the most essential energy-saving tax credits offered to businesses is the solar investment tax credit. This credit gives a 30% tax credit for companies that install, develop, and/or finance solar energy property.
R&D Tax Credits
R&D tax credits are available to all organizations that engage in certain activities to develop new or improved products, processes, software, techniques, formulas or inventions. Typically, 6% to 8% of a company’s annual qualifying R&D expenses can be applied, dollar for dollar, against its federal income tax liability. Businesses can also claim an R&D tax credit of up to $250,000 per year against their payroll taxes. Eligible organizations include those that have under $5 million in gross receipts in the current year and no more than 5 years of generating gross receipts, including the current year. 3
Establish a Tax-Favored Retirement Plan
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 are self-employed and set up a SEP-IRA, you can contribute up to 25% of your self-employment earnings if you are an S-Corp, C-Corp or Partnership. Sole Props can contribute up to 20%.
Are you familiar with the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and how it impacted 401(k) rules? It is a bipartisan bill with more than 40 provisions that aim to give Americans more, easier ways to save for retirement. The hope is that this bill will encourage more people to save through 401(k) plans or other retirement options.
Most of the provisions in the SECURE Act 2.0 make it easier for businesses to offer and maintain retirement savings plans and expand ways participants can contribute to and make withdrawals from their retirement savings. The SECURE Act provides a tax credit to small employers with up to 100 workers that start a workplace retirement plan, with an additional credit available if the plan includes automatic enrollment.
Give to Charities
Tax deductible donations can reduce taxable income. To claim tax deductible donations on your taxes, you must itemize on your tax return by filing Schedule A of IRS Form 1040 or 1040-SR. In general, you can deduct up to 60% of your adjusted gross income via charitable donations, but you may be limited to 20%, 30% or 50% depending on the type of contribution and the organization. Keep track of your tax deductible donations, no matter the amount. If you made a monetary contribution, qualifying documentation includes a bank statement, a credit card statement and a receipt from the charity (including date, amount and name of the organization). 4 This donation deduction ($300 for single taxpayers and $600 for married couples) was not extended to tax year 2022.
Final thoughts
Now is an ideal time to meet with your tax advisor to get a good idea of where you stand year-to-date. What tax actions should you take before end of year? Be sure to continue to watch for congress and IRS developments and see an expert for more guidance on new tax rules.
Businesses of every size should think ahead when it comes to planning out taxes and reducing how much they owe. With proactive tax planning, you can account for new tax law changes and take advantage of other business deductions that minimize your taxes owed come Tax Day. Contact the tax professionals at Jeanine Hemingway, CPA to schedule a discussion. We are happy to answer questions and provide guidance. Click here to get started on your year-end tax planning.
Sources:
1. Work Opportunity Tax Credit, IRS.gov
2. Employers budgeting big pay raises for 2023, HRexecutive.com
3. What is the federal research and development (R&D) tax credit?,
4. Charitable Giving, IRS.Gov