2022 YEAR-END INCOME TAX PLANNING FOR BUSINESSES
INTRODUCTION
It’s hard to believe we are already nearing the end of 2022. As we begin looking forward to the possibilities of a new year, it’s important to take a moment to look back and review 2022 for possible tax planning opportunities for your business. If you have any questions or want to discuss planning ideas not included in our letter, please call our firm.
Be careful! Although this letter contains planning ideas, you cannot properly evaluate a particular planning strategy without calculating the overall tax liability for the business and its owners (including the alternative minimum tax) with and without the strategy. In addition, this letter contains ideas for Federal income tax planning only. State income tax issues are not addressed. However, you should consider the state income tax impact of any particular planning strategy.
Also, it is possible Congress could pass new legislation between your receipt of this letter and December 31st. Please call our firm before implementing any tax planning technique discussed in this letter.
YEAR-END TAX PLANNING TECHNIQUES
Pay Special Attention To Timing Issues. In the following discussions we include suggestions for year-end tax planning strategies that would cause you to accelerate deductions into 2022, while deferring income into 2023.
However, for businesses that expect their taxable income to be significantly lower in 2022 than in 2023, the opposite strategy might be more advisable. In other words, for struggling businesses, a better year-end planning strategy could include accelerating revenues into 2022 (to be taxed at lower rates), while deferring deductions to 2023 (to be taken against income that is expected to be taxed at higher rates).
First Year 168(k) Bonus Depreciation Deduction. The 168(k) Bonus Depreciation deduction is 100% for qualifying property acquired and placed in service after September 27, 2017 and before January 1, 2023. Both new and used property qualifies for Bonus Depreciation as long as it has a depreciable life for tax purposes of 20 years or less (e.g., machinery and equipment, furniture and fixtures, sidewalks, roads, landscaping, computers, computer software, farm buildings, and qualified motor fuels facilities).
After 2022 the Bonus Depreciation deduction is reduced as follows for property placed in service: During 2023 – 80%, During 2024 – 60%, During 2025 – 40%, During 2026 – 20%, and After 2026 – 0%.
Annual Depreciation Caps For Passenger Vehicles Increased. While vehicles used primarily in business generally qualify for Bonus Depreciation, there is an annual cap if the vehicle has a loaded GVW less than 6,000 lbs. In 2022, this cap is $19,200. For vehicles with a loaded GVW over 6,000 lbs, 100% of the cost is deductible in 2022 as Bonus Depreciation.
S Corporation Shareholders Should Check Stock And Debt Basis Before Year-End. If you anticipate a loss from your S Corporation, it may not be entirely deductible. Losses exceeding your basis in the S corporation are not deducted, but are carried over to succeeding years. You have basis to the extent of the amounts paid for your stock (adjusted for net pass through income, losses, and distributions); plus, any amounts you have personally loaned to your S corporation. Remember: A shareholder cannot get debt basis by merely guaranteeing a third-party loan to the S corporation. It may be possible to restructure S-Corp debt to provide basis, so please give our office a call.
Deductions For Business Meals. For 2021 and 2022, otherwise deductible business food and beverages are 100% deductible if provided by a restaurant. The meal portion of the per diem method also qualifies for the 100% deduction. The deduction for meals not provided by a restaurant remains limited at 50%. Planning Alert! The 100% deduction for otherwise deductible business food and beverages provided by a restaurant expires for restaurant meals paid or incurred after 2022.
IRS Increases Standard Mileage Rates Effective July 1, 2022. The standard mileage rate was increased from 58.5 cents per mile (which was effective for business mileage beginning January 1, 2022) to 62.5 cents per mile effective July 1, 2022. Planning Alert! Be sure to keep proper records of business mileage for 2022 and future years.
Don’t Overlook Simplified Accounting Methods For Certain Small Businesses. The Tax Cuts And Jobs Act (enacted in late 2017) provides the following accounting method relief provisions for businesses with Average Gross Receipts (AGRs) for the Preceding Three Tax Years of $27 Million or Less (for 2022): 1) Generally allows businesses to use the cash method of accounting even if the business has inventories, 2) Allows simplified methods for accounting for inventories, 3) Exempts businesses from applying UNICAP, and 4) Liberalizes the availability of the completed-contract method. Planning Alert! The IRS has released detailed procedures to follow for taxpayers who qualify and wish to change their accounting methods in light of these relief provisions. Please call our firm for more details.
Don’t Forget To Properly Document And Provide Details For Contributions! Be sure to have the proper documentation for any contributions made during 2022 in order to deduct them against taxable income. The IRS recently denied Hobby Lobby’s donations in the amount of $84.6 million because the FMV and basis of each item were not properly reported on Form 8283, when filed with its return. If you are concerned about what documentation you need to deduct a contribution, please call our firm for help.
Employee Retention Credit The employee retention credit expired for qualifying wages paid after September 30, 2021 except for qualifying wages paid by a recovery startup business for which the credit expired for wages paid after 12/31/21. Planning Alert! If you didn’t take the Employee Retention Credit on qualifying wages, you can amend Form 941 by filing Form 941-X. Generally, this form must be filed by the later of 3 years from the date you filed your original return, or 2 years from the date you paid the tax.
Caution! The IRS recently warned employers to be aware of organizations offering to help them claim the Employee Retention Credit (ERC) when they may not actually qualify. The IRS said in the warning –“To be eligible for the ERC, employers must have:
• sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
• experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• qualified as a recovery startup business for the third or fourth quarters of 2021.”
The IRS says, “Some third parties are taking improper positions related to taxpayer eligibility for and computation of the credit. These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.” Note! If your company didn’t take the ERC and you believe it may qualify, please call our firm and we will review your information to determine if it does.
SELECTED RECENT DEVELOPMENTS
The Inflation Reduction Act Of 2022. On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA). The IRA, among other things, extends and creates various energy provisions for businesses and introduces: 1) a 15% alternative minimum tax (AMT) and 2) a 1% excise tax, both of which apply to specific corporations beginning in 2023. We want to make you aware of this new legislation, however many of the provisions of the IRA are effective after 2022. Therefore, we believe a detailed discussion of the IRA provisions affecting businesses are beyond the scope of this year-end planning letter. However, the following are a couple of changes made by the Inflation Reduction Act which may affect your year-end planning. If you would like more details about the Inflation Reduction Act of 2022, please call our firm.
• To Qualify For The 2022 EV Credit Final Assembly Must Occur In North America For Electric Vehicles Purchased After August 16, 2022. The IRA made dramatic changes to the credit allowed for electric vehicles purchased after 2022. However, the IRA also changed the requirements to obtain a credit (of up to $7,500) for an electric vehicle (EV) purchased after August 16, 2022. For EVs purchased after August 16, 2022, the final assembly of the vehicle must occur in North America to qualify for the credit. However, this “final assembly requirement” does not apply where the taxpayer entered into a written binding contract to purchase a new qualifying EV before August 16, 2022, but took possession of the EV on or after August 16, 2022. Planning Alert! The IRS says, “If you purchase and take possession of a qualifying electric vehicle after August 16, 2022 and before January 1, 2023, aside from the final assembly requirement, the rules in effect before the enactment of the Inflation Reduction Act for the EV credit apply (including those involving the manufacturing caps on vehicles sold).”
• New “Clean Vehicle Credit” For Vehicles Purchased After 2022 And Before 2033 (Code Section 30D). Prior to the IRA, credits of up to $7,500 were provided for new “Qualified Plug-In Electric Drive Motor Vehicles” and for qualified fuel cell motor vehicles. The IRA provides a new revised credit for “Clean Vehicles” after 2022 and before 2033. A “Clean Vehicle” includes a qualified electric vehicle (EV) as outlined in Section 30D and a qualified fuel cell motor vehicle. Planning Alert! These credits for Clean Vehicles apply to personal-use vehicles and to business vehicles. However, the new Clean Vehicle credit for commercial vehicles discussed next may only be used for depreciable property and may be less restrictive than these general “Clean Vehicle” credits.
• Credit For Qualified Commercial Clean Vehicles Acquired And Placed In Service After 2022 And Before 2033. The credit for Commercial Clean Vehicles is the lesser of 1) 30% of the vehicle’s basis or 2) the cost of the vehicle over the cost of a comparable gas or diesel vehicle, if the vehicle is 100% electric. The 30% credit amount is reduced to 15% if the vehicle has a gasoline or diesel component (i.e., if a hybrid). The maximum credit is $7,500 if the GVWR is less than 14,000 pounds and $40,000 if the GVWR is 14,000 pounds or more. Planning Alert! There are AGI limitations, limitations on the cost of the vehicle, and a requirement that final assembly of the vehicle must occur in North America to qualify for the Clean Vehicle credit discussed above. These limitations do not apply to the Commercial Clean Vehicle Credit. Businesses planning on acquiring electric vehicles should consider this new 2023 credit for Commercial EVs and the Clean Vehicle Credit discussed above before acquiring an electric vehicle in 2022. It may pay to wait until 2023.
Returns Extended To October 17, 2022 Are Now Due February 15, 2023 For Florida, South Carolina, And North Carolina Residents And Businesses. On October 5, 2022 the IRS announced that individuals and businesses in North Carolina and South Carolina have until February 15, 2023, to file various federal individual and business tax returns for 2021. The IRS made a similar announcement on September 29 for Florida residents and businesses. In addition, individuals and businesses in these states may deduct losses from Hurricane Ian since Ian has been declared a federal disaster. Practice Alert! You have the option to deduct any Hurricane Ian loss not covered by insurance on either your 2021 income tax return or on your 2022 income tax return. You should generally take the deduction on the return which produces the most tax benefit. If you are a resident or have a business in one of these states, please call our firm and we will help you decide if it is better to take any loss on your 2021 or 2022 return. In addition, we will gladly provide more details concerning Hurricane Ian relief. Also, more detailed information concerning the Federal Hurricane Ian relief provided for Florida, South Carolina, and North Carolina can be found at https://www.irs.gov/newsroom/help-for-victims-of-hurricane-ian.
FINAL COMMENTS
Please contact us if you are interested in a tax topic that we did not discuss. Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. In addition, please call us before implementing any planning idea discussed in this letter, or if you need additional information concerning any item mentioned in this letter. We will gladly assist you. Note! The information contained in this material should not be relied upon without an independent, professional analysis of how any of the items discussed may apply to a specific situation.
Disclaimer: Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of promoting, marketing, or recommending to another party any transaction or matter addressed herein. The preceding information is intended as a general discussion of the subject addressed and is not intended as a formal tax opinion. The recipient should not rely on any information contained herein without performing his or her own research verifying the conclusions reached. The conclusions reached should not be relied upon without an independent, professional analysis of the facts and law applicable to the situation.
