Every cloud has a silver lining. That’s especially true of the clouds that gather around business owners near tax time (which happens to be all the time, by the way). The tax code is highly complex.

According to one estimate, the federal tax code — at a whopping 2,652 pages — is 187 times longer than it was a century ago. The silver lining to all this? Within that highly complex tax code are the keys to the kingdom: unlocking enormous tax savings.

This is especially true for businesses, because government organizations at the federal, state, and local levels all want to stimulate business development. They know their funding is tied directly to the profits and personal income that those businesses generate. And the primary way governments stimulate business is by offering tax breaks and incentives.

Tax Forms for Businesses

As a business owner, you can capitalize on those tax breaks by 1) knowing about them and 2) taking full advantage of them over the course of the tax year. That means not waiting until April 15 of the following year, when it may be too late.

In this post, we address four areas of focus for reducing your business taxes in the 2022 tax year. We also want you to consider asking your CPA or tax planning firm about scheduling a mid-year meeting for your business, because the steps you and your CPA take now will pay dividends in the Spring of 2023!

First up is a section of the tax code that allows you to deduct the cost of certain types of property as an expense, rather than requiring that the cost of the property to be capitalized and depreciated.

Section 179 Expense and Bonus Depreciation

The U.S. tax code provides different methods for writing off the cost of new or used machinery or equipment. Consider the following four options:

  • Claim depreciation over the course of several years following a depreciation schedule, which varies based on the asset type.
  • Expense the entire cost of the asset in the year your business acquired it. Under Section 179, you can elect to expense up to $1.08 million of qualified purchases, subject to taxable income limitations.
  • Claim 100 percent bonus depreciation, which is not limited to taxable income, although some other limitation could apply. (Under current law, 100 percent bonus depreciation is scheduled to be reduced to 80 percent for property placed in service in 2023.)
  • Put off acquiring the asset to next year, to see whether you’ll be subject to a higher tax rate next year, in which case acquiring the asset next year could result in a larger tax break.

Many factors influence this decision, including current and future tax rates. With the possibility of higher rates in 2023, the best choice may be to wait and see.

If you’re thinking of acquiring business property between now and the end of the year, we can provide guidance to help you decide what’s best for your business in terms of tax savings and other business considerations. Tax savings should never be the only factor when timing the purchase of assets.

Retirement Plan Contributions

Setting up a qualified retirement plan for your business allows you to make deductible contributions for 2022 while allowing the earnings in the plan to grow tax free until the funds are withdrawn. Types of qualified retirement plans include Individual Retirement Account (IRA), one-person 401(k), Simplified Employee Pension (SEP) plan, defined benefit, and defined contribution. Here at SWC, we can help you decide which plan is the right fit for your business based on your income level, whether you have employees, and other factors.

If you’re interested in going at it alone, you’ll need to know that contribution limits vary per plan type. For 2022, the following contribution limits apply:

  • Defined contribution plans and SEPs have a maximum contribution amount of $61,000.
  • One-person 401(k) plans are limited to $20,500 for elective deferrals made by the employee. and $61,000 for combined employee/employer contributions.
  • IRA contributions are generally limited to $14,000.
  • If you are age 50 or older, you also can make additional catch-up contributions of $6,500 for a one-person 401(k) plan or $3,000 for a SIMPLE IRA.
  • Defined benefit plans can’t provide an annual benefit that exceeds the lesser of $245,000 or 100 percent of compensation for the three highest years.

One benefit of making contributions to a qualified retirement plan is that the contribution may not need to be made by the end of 2022. The employer portion of the contributions can sometimes be made as late as Oct. 16, 2023.

In addition to making current year deductions, you may be eligible for two tax credits:

  • A small-business employer who starts a new retirement plan is eligible for a nonrefundable income tax credit of up to the greater of (1) $500 per year or (2) the lesser of $250 per eligible employee or $5,000 for the administrative and retirement-education expenses of adopting a new qualified defined benefit or defined contribution plan, a SIMPLE IRA plan, an annuity plan under 403(a), or a SEP.
  • A second tax credit exists for small-business employers that include an auto-enrollment feature in a qualified plan. Eligible employers that include an Eligible Automatic Contribution Arrangement (EACA) in a qualified plan can claim an annual credit of $500 for up to three tax years. The credit also is available to employers who convert an existing plan to an automatic enrollment design.

Employing Family Members

If one of your objectives is to reduce overall business tax liability, employing family members might be a useful strategy. Here’s how:

  • If your family member is a bona fide employee, your business can deduct the wages and benefits, including medical benefits, paid to the employee on Schedule C or F as a business expense, thus reducing your self-employment tax liability.
  • Wages paid to your child under the age of 18 are not subject to federal employment taxes, will be deductible at your marginal tax rate, are taxable at the child’s marginal tax rate, and can be offset by up to $12,950 (your child’s maximum standard deduction).

Note that to take advantage of these tax savings, your family member must be a bona fide employee, and you must follow basic business practices, such as keeping time reports, filing payroll returns, and basing pay on the actual work performed. To learn more about how hiring your kids may save you money, read Part 6 in our Small Business Guide to Reducing Your Tax Burden Legally.

Business Meal Expenses

Normally, business meal expenses are limited to a deduction of 50 percent of the total costs. However, for 2022, food and beverages provided by a restaurant are allowed a 100 percent deduction.

Taxpayers who use the per diem method may treat the entire meal portion of the per diem rate paid or incurred in 2022 as being attributable to food or beverages provided by a restaurant, making the meal per diem 100 percent deductible.

Tax Saving Tip: Consider moving any major business meals originally planned for early 2023 into late 2022 in order to obtain the higher deduction. For example, if you’re in the habit of hosting end-of-year holiday dinners after the first of the year (in order to skip the holiday rush because of difficult to secure reservations), make reservations for November or December gatherings in August!

Here at SWC, we think of ourselves as our clients’ business partners. Our success is tied directly to how successful you are in your career, business, and your life. So, it’s little wonder that we encourage you to consult with us whenever you’re considering what appears to be a major opportunity or facing a challenging business decision, regardless of whether it’s related to taxes.

In the meantime, if you own or operate a business, schedule your 2022 mid-year tax-meeting now, to update us about your business plans and challenges and lay the groundwork for helping you minimize your business tax obligations for 2022.

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Disclaimer: The information in this blog post is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at SWC (Stees, Walker & Company, LLP), nor is this the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant (CPA) in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.