8 End-of-Year Tax Planning Strategies for 2022
As the economy marches through the final months of 2022, business owners will face ongoing changes this tax season.
Even so, there is still time to take steps to reduce your tax burden.
With the right strategies and a forward-looking mindset, even small efforts can yield gains for the financial health and growth of your business.
Here are eight tax strategies you can implement to end the year on the right note.
1. Be Careful with Your R&D Deductions
The Tax Cust and Jobs Act passed in 2017 contains a provision that beginning on January 1, 2022, research and development (“R&D”) expenses are no longer deductible in the year incurred. This year, they must be capitalized and deducted over 5-15 years, which could mean a hefty increase in taxable income.
Work with your tax advisor to understand the interplay between research and development expenses and ordinary and necessary business expenses to ensure you are appropriately capturing all current year deductions. Any expenditures that do meet the definition of research and development costs may also be eligible for the R&D Tax Credit.
2. Take Advantage of Capital Purchase Deductions Before They Shrink
Businesses are currently eligible to depreciate 100% of the cost of most capital purchases, including vehicles, equipment, and machinery. Next year it phases out to 80%, and after that 60%, and so on. If you need to make a major purchase, try to do it before the calendar year closes so you can take advantage of maximum deduction allowances.
3. Take Advantage of Green Energy Credits
As part of the Inflation Reduction Act, the government is offering an increase in tax credits for expenses that support energy efficiency. Credits exist for solar panels, battery storage, geothermal systems, heat pumps, and energy-efficient doors and windows. Homebuilders can get a credit of up to $2,000 per home if the home meets certain energy standards. Whoever builds the home is eligible.
For new electric-vehicles purchased between August 17th and December 31st, a new requirement exists that the final assembly must take place in North America to be eligible for the electric vehicle tax credit of up $7,500. Manufacturer caps still exist through the end of 2022 making GMCs and Teslas in eligible.
For electric vehicles purchased after December 31st 2022, take note of the many changes to the electric vehicle credit; including a tax credit for purchasing a used vehicle, critical minerals sourcing requirements, battery components requirements, MSRP limitations, and income limitations of the owner.
4. Elect to Take Advantage of Ohio’s State and Local Tax cap workaround
A new law for the 2022 tax year will enable some Ohio business owners to reduce their federal tax bills by avoiding the cap on State and Local Tax Deductions (SALT) imposed as part of the 2017 Tax Cut & Jobs Act. Right now, all Ohio business owners have deductions capped at $10,000 for the sum of state and local income taxes and personal real estate taxes.
The new law is part of a trend among state lawmakers across the country to allow business owners to elect to have state and local income taxes on their business income, deducted and paid by the business, rather than the individual. This effectively eliminates the cap for SALT taxes on business income for owners of pass-through entities.
To take advantage of this workaround, eligible pass-through entities will need to file a new PTE tax form, IT 4738– it’s not automatic.
5. Do Something Nice for Your Employees
Looking at your options through the end of the year, you could choose to add to employee health and profit-sharing plans. You may want to disburse employee bonuses before the end of the year. If you are interested in maxing out IRAs, it’s best to do that sooner rather than later. You could also contribute towards a 401K or Health Saving Accounts (HSAs).
HSAs are a great deduction to maximize. They’re triple tax advantaged:
- They are funded with pretax dollars
- Employees don’t pay tax when they withdraw funds for health care
- The money can be invested with no tax on earnings
Maximum contributions for 2022 are $7,300 for a family, and $3,650 for individuals.
If your business has a health insurance plan that qualifies, you can contribute to your employees’ HSAs. Speak with your tax adviser to determine the optimal amounts, cash flow impacts, and timing of when contributions have to be made.
6. Get Your 1099s in Order
Be sure you haven’t overlooked any 1099s that must be sent to all individuals or non-incorporated companies that you paid more than $600 in the course of the year for services provided. If you don’t send them, your business may be audited, and the IRS can deny any deductions that you did not report on a 1099. Form 1099 has to be filed by Jan. 31. You must know the business EIN, address, name – if it’s a person – and their Social Security number. A best practice is to require vendors to complete a W-9 before you pay them. It is much more difficult to track down this information after the fact.
Common 1099 recipients include landscapers, lawyers, accountants, copy writers, construction companies, small contractors, cleaning companies, and other vendors who provide a service rather than a product.
7. Look Into Your Change of Entity Options
If you’re a sole proprietor and are currently paying a lot in self-employment taxes, you may want to consider changing your entity structure into a more advantageous structure such as converting to an S-Corporation, for example. Work with your CPA to evaluate the pros and cons of the various options.
8. Get an Early Start on Your 2023 Strategies
Once you’ve reviewed this quarter’s financials and everything is in order, it’s not too soon to begin setting goals for 2023. You can partner with a CPA to work through projections and forecasts to create the right strategies for your business.
The longer you let your taxes weigh on your mind, the more time you’ve lost that you could be using to move your business forward.
Speak to a Tax Planning Expert
At Kirsch CPA Group, we help clients “spend more time looking through the windshield and less time looking in the rearview mirror.” Tax planning is a key component to keep your business taking advantage of strategic moves to save on taxes.
If that’s not the kind of service you’re getting from your accounting provider, it may be time to upgrade. Contact us to learn more about strategic tax planning and what our holistic approach can do for your business.