US tax policy changes remain top of mind for many business owners in 2022. Considerable tax changes for businesses in recent years have resulted in a major corporate tax rate reduction, generous expensing and depreciation rules for businesses. There are also a few provisions in the Inflation Reduction Act that impact corporations, though it may only affect a few corporations. The Act’s energy-related credits will not go into effect until 2023.
There are several planning strategies business owners should consider prior to year-end to best position your business for future growth in 2023.
1. Review Corporate Structure and Tax Status
End of year is a good time to revisit whether your business structure is still the best fit. Closely held business owners have several options for structuring a business. Many businesses operate as a sole proprietorship with one owner servicing and managing the business. In fact, according to US Census data, 73% of businesses are sole proprietorships. Other businesses – especially those with more than one owner – are structured as partnerships, limited liability companies (LLCs), S corporations or C Corporations. The structure of your business also impacts how taxes are filed – so future tax rate changes may significantly impact your tax liability. Tax savings are not the only factor to consider in structuring a business, so it is important to consult your tax advisor to discuss options.
2. Review Retirement Plan Options
Qualified retirement plans can be a powerful way to lower current tax liabilities as well as provide opportunities for owners and employees to save significantly for retirement. Individuals who already have these plans should use the end of the year as an opportunity to fully fund their contributions or at least contribute enough to receive the entire company match, if applicable. If you have a Roth option for your retirement plan, review your current tax rate and try to determine whether your tax rate will be higher in retirement. If you think it will be, it may be wise to allot some of your retirement contributions to the Roth option and forego the current tax savings as contributions to a Roth do not generate a tax deduction.
3. Establish or Revise Wealth Transfer Strategies
As circumstances change throughout the year, it is wise to establish or revise wealth transfer planning strategies available to minimize federal and state income and transfer taxes (estate, gift and generation skipping). As always, gifting at year-end – whether outright or in trust to individuals or charities – is a planning strategy available to reduce income tax and/or estate tax liability. You have until year-end to make annual exclusion gifts of up to $16,000 per person. If you are married, you may “gift split” and gift $32,000 to one person. Keep in mind, the gift must be out of your control by year-end.
Creating an estate plan to establish long-term lifetime trusts or trusts at death via your will that hold business interests may significantly maximize your income and transfer tax savings – especially if looking to transition your business to the next generation. Consult estate and tax planning professionals prior to year-end to determine if such tax saving strategies work for you and your business.
4. Take Advantage of the Business Expensing Election (Section 179 Election)
For qualified property placed in service in tax years beginning in 2022, the maximum amount that may be expensed under the dollar limitation of Code Sec. 179 is $1,080,000 – up $30,000 from 2021 – and the beginning-of-phaseout amount increased to $2.7MM, as adjusted for inflation. The expensing deduction can be claimed regardless of how long the property is held during the year. Therefore, property acquired and placed in service in the last days of the tax year, rather than at the beginning of the following year, can result in a full expensing deduction for the earlier year. The deduction includes both new and used qualified equipment.
5. “Bonus” Depreciation – Use It or Lose It!
Unlike standard amortization, bonus depreciation immediately enables tax savings – which can be a valuable business incentive when costs are rising. Bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, a 100% write off may be claimed even if qualifying assets are in service for only a few days.
Unfortunately, the advantages of bonus depreciation deduction will not last forever. Starting on January 1, 2023, bonus depreciation will begin to phase out over four years, ultimately ending in 2026. So, if you plan to make a significant investment in equipment, it may be prudent to make such purchases sooner rather than later.
Planning Options Summarized:
Establish qualified retirement plans prior to year-end.
Assess the ability to take losses on current-year returns for at-risk limitations and basis status.
Know that 2022 is the last year for 100% federal bonus depreciation. This deduction is scheduled to be phased out over the next few years. States do not always allow for bonuses.
Take advantage of the qualified business income deduction of 20%, which sunsets in 2025.
All tax situations are unique and should be analyzed yearly for each entity, given the constantly changing tax environment. As always, consult with tax professionals on any areas of concern or questionability as the rules are complex and missteps can be costly.
For assistance with your 2022 tax preparation contact CBBS today at 603-541-7485 or schedule a free consultation, and we’ll be happy to help you navigate tax season successfully!
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