5 Tax Tips for Small Business Owners
2022 has proven to be among the most eventful, challenging years for many small business owners. With uncertainty surrounding a recession and high inflation rates, you have certainly dealt with enough. Here are five things you can do at the end of this year to prepare for tax season.
1. Review IRS Elections (Especially if You Had a Net Operating Loss)
If you had a net operating loss (NOL) this year, double-check your IRS elections to ensure you made the correct ones. For example, net-operating losses from taxable years after 2020 are now limited to 80% of the excess taxable income, and the special 5-year carryback no longer applies. Now, net-operating losses can only be carried forward. Confusion over these rules and how they apply to small business owners is one of the biggest issues we see with clients who own a small business — but taking the time to make the proper elections can drastically affect the amount you owe in taxes.
How you structure your small business can make all the difference when it comes to taxes. A tax professional can help you decide which entity type is the best for your business and help you apply before the deadline hits.
For example, let’s say you found out you could save more in taxes by structuring your business as an S Corporation instead of an LLC. If you’re a new business, you have two months and 15 days from the day you file your articles of formation to file your S Corp elections. So, if you filed your articles of formation on March 1, you have until May 16 to file your S Corp election for it to take effect that same tax year.
2. Review Your Deductions
The CARES Act brought about major tax incentives to people who donate to charity in 2020 and 2021, but the provisions of this Act have not been extended to 2022. For those who take the standard deduction, this means you can no longer write off up to $300 in cash donations from your tax return. Also, itemized charitable deductions are once again capped at 60% of your adjusted gross income for cash donations made. If you plan to take charitable deductions in 2022, review them carefully to make sure they meet new requirements.
Deductions are still available for basic business expenses, and these can help reduce your taxable income. Some common examples of business expenses include:
- Legal and professional fees
- Office expenses, including costs related to the business use of your home
- Business use of your vehicle
- Continuing professional education
- Memberships to professional organizations
Tax-deductible business expenses need to be ordinary and necessary to operate your business. Consult your tax professional for more details on qualified business expenses.
3. Review Depreciation
New depreciation rules have been enacted recently due to the Tax Cuts and Jobs Act (TCJA). These changes allow you to write off most depreciable assets “in the year they’re placed into service,” according to the IRS.
Common items you can write off for depreciation include computers, equipment, machinery, cell phones, buildings, office furniture, and vehicles, as well as intangible items like copyrights.
Make sure you keep a list of everything that counts as a depreciable expense. Doing so will help you lower your business’s taxable income.
4. Check Eligibility for Company Retirement Plans
Several different tax-advantaged retirement plans are available to small business owners, including the solo 401(k), the SEP IRA, and the SIMPLE IRA. A solo 401(k) is designed for business forms with only one employee, the business owner. SIMPLE IRAs can be used for businesses with more employees, though they are capped at 100 employees.
Since most businesses will have more than one employee, SIMPLE IRAs are generally more common. According to the IRS, employees can participate in a SIMPLE IRA if they earned at least $5,000 in compensation from the business in at least two previous years.
Keep in mind that SIMPLE IRAs have strict rules regarding employer contributions, which are mandatory. The employer must give every plan participant an annual 3% match or make a 2% nonelective contribution for every eligible employee. If you fail to make the correct contributions, your plan could lose its qualified status or incur penalties and fines from the IRS.
Adding an employer-sponsored retirement plan to your company can be a great way to take advantage of tax credits, including those for setting up a new plan and auto-enrolling employees. You may also be eligible for additional tax deductions by making qualified employer contributions on your employee's behalf. It’s important to review your options with a qualified financial professional before deciding on a retirement plan as each plan type has unique benefits and drawbacks.
5. Review New Due Dates & Filing Methods for 1099s
Starting in 2020, any freelancers or contract workers who earned more than $600 from your company will receive Form 1099-NEC instead of 1099-MISC. NEC is “non-employment compensation,” and it’s only used to report independent contractor income.
1099-NEC forms are due on January 31. If this day falls on a weekend, they’re due the following business day.
How We Help
At Black Walnut Wealth Management, we specialize in helping small business owners accumulate, preserve, and enjoy their wealth for years to come. We're happy to assist you if you need help tying up loose financial ends before the new year rolls around. We also work closely with our CPA network to ensure you’re receiving seamless financial advisory services, including tax planning and cash-flow management.
Eric Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management, a financial advisory firm providing financial counsel and fiduciary investment services to individuals, families, and private foundations throughout the Traverse City and Northern Michigan region. He is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Retirement Planning Counselor℠ with 25 years of experience. He also has a bachelor’s degree in finance from Hillsdale College. Braund is passionate about offering services rooted in hard facts and sound reasoning combined with meaningful, long-term relationships so that his clients can experience less stress and have more time and energy to invest in what they love.
Braund is a Northern Michigan native who truly enjoys all the area offers, including hiking, biking, swimming, skiing, volleyball, and boating. He loves spending time with his family — his wife, Jodi, and his two children — and maintaining a balanced life. To learn more about Eric Braund, connect with him on LinkedIn.
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