With increasing costs due to inflation putting a strain on cash flow, lowering your tax liability is one way to help your business. While there are often many tax changes in any given year, 2022 has been slow in comparison.
We don’t expect immediate tax changes over the next year. However, never say never when it comes to congress.
While preparing your business for the end of the year, look at these tax moves you may not have considered to lower your tax liability in 2022.
Defer Taxable Income
One way to lower your tax liability is to defer taxable income by increasing your deductible expenses, decreasing your income, or both. Consider sending invoices to clients in January 2023 rather than in December 2022 (if your cash flow allows). Then, pay outstanding invoices or bills before December 2022 instead of putting them off until next year. In addition, if your business team is considering selling investments or business properties, wait to close the sale until 2023 when possible.
Maximize Retirement Plan Contributions
Retirement plan contributions are an easy way to save for the future while decreasing taxable income. Bonus, monies deposited grow tax-free while it’s in the account. If your business already has a retirement plan set up, consider making the maximum deductible contribution for 2022. While you can sometimes make these contributions up until you file taxes, this reduces the timeframe for generating tax-deferred earnings.
Don’t have a retirement plan established for your business? Now may be a good time to start one. Small business retirement plan options include the 401(k), defined benefit pension plans, SIMPLE-IRA plans, and SEP-IRAs. Self-employed persons can contribute up to 20% of self-employment earnings up to $61,000. If you’re self-employed by your corporation, that contribution increases to 25% of self-employed earnings up to $61,000.
In addition, setting up a retirement plan can come with additional tax credits. Small employers who start a new retirement plan are eligible for a nonrefundable income tax credit of up to $5,000 for the administrative and retirement-education-related expenses on qualified plans. Including an auto-enrollment feature on the qualified plan? Your business could be eligible for a tax credit of $500 yearly for the next three years.
Contact our knowledgeable tax professionals to discuss the benefits of different retirement plans.
Plan Your Business Asset Purchase
In 2022, businesses can take a bonus depreciation deduction of 100% on qualified assets purchased during the year. Beginning in 2023, that rate drops to 80%, with the remaining 20% deducted during the asset’s recovery period. Note: Recovery periods can last up to 20 years, depending on the asset.
Qualifying property that is not eligible for bonus depreciation may be eligible for Section 179, expensing up to $1.08 million. Keep in mind that this deduction begins to phase out when the asset’s cost exceeds $2.7 million. This means your business could possibly write off the entire cost of business asset purchases in 2022. Give our team a call to discuss what assets qualify for bonus depreciation and Section 179 deductions.
Move Business Meetings
The standard business meal deduction is 50% of the meal’s total cost. However, the cost of food and beverages for business meals provided by a restaurant that is paid or incurred in 2022 is 100% deductible. For businesses that use the per diem method to reimburse employees, consider asking those you’re meeting with in January to meet before the end of the year to increase business meal expenses while you can deduct the entirety of the cost. For businesses that use the cash method to reimburse meal expenses, consider prepaying the cost of business meals to be provided in a restaurant in 2023. It can be deducted if it is incurred within 12 months of the purchase date.
To discuss any end-of-year moves your business can make to decrease your tax bill, or plan for the 2023 tax season (including the introduction of the Massachusetts Millionaire’s Tax), reach out to our team of experienced tax professionals!