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The U.S. Tax Code is over 60,000 pages long, but don’t worry, you don’t have to read it. We’re summarizing several tax law changes affecting small businesses. These are changes that happened in 2020 with the Covid-19 pandemic, government stimulus packages and with the newly passed Infrastructure Investment and Jobs Act. We’re breaking out the key ones you need to know so you can stay ahead of the curve.
Make sure to consult with your CPA to learn how these tax law changes will affect your business. We recommend meeting with your tax CPA at least semiannually, preferably quarterly, to prepare adequately before year-end.
Section 199A: Pass-through business owners (S corporations, LLCs, sole proprietorships, or partnerships), regardless of the type of business you own, you can claim up to a 20% tax deduction on your share of the business’s income up to $170,050 in tax year 2022, or $340,100 if filing jointly. Currently, the C corporation rate is 21%.
Every business should be taking advantage of this small business income tax deduction and you need to make sure you get it on your 2022 tax return. The benefit here is the fact that it’s now spanned over multiple industries, not just manufacturing.
Bonus Depreciation: The maximum deduction in tax year 2022 is $1,080,000 and the 2022 spending cap for purchases is $2,700,000. Unlike other tax relief, Section 179 is permanent. The Tax Cut and Jobs Act (TCJA) includes a provision for bonus depreciation that allows a deduction for 100% of the purchase price of qualifying property. After tax year 2022, the bonus depreciation rate will be reduced annually:
This is the time to be asking yourself if this is the year to make a capital purchase. If the answer is yes, you need to consider what year you should buy it in, and your cash flow forecast to make sure you have a capital expense budget for 2022.
Family Medical Leave: The Tax Cuts and Jobs Act (TCJA) provides eligible employers who offer paid family and medical leave to their employees a tax credit for tax years 2018 and 2019. The Consolidated Appropriations Act of 2022 (CAA) extends this helpful credit through 2025.
Retirement Plan Contribution Limits: The contribution limit for elective deferrals to 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan increases to $20,500 for 2022. The total amount that can be contributed to a plan by you and your employer combined rises to $61,500 from $58,000 in 2021. However, the amount of the catch-up contribution for taxpayers aged 50 and older remains at $6,500. You go all the way up to $20,500 for an individual contribution, for example, to a 401k and the combine employer employee goes, all the way up to $61,500 from 58,000 in 2021.
Parking and Mass Transit: Employers can provide a little more to their workers in 2022 when it comes to parking and transportation-related fringe benefits. The 2022 cap on employer-provided tax-free parking goes up from $270 to $280 per month. The 2022 exclusion for mass transit passes and commuter vans is also $280 up from $270 in 2021.
Business Meals: For 2021 and 2022, the business meals deduction is up from 50% to 100% if the food and beverages are from a restaurant.
Charitable contributions: Unlike some of the other changes, the charitable contribution rule is a positive one for taxpayers for the 2021 tax year. A C corporation can deduct donations up to 25% rather than the previous 10% of its taxable income (to do so, the business must elect the Increased Corporate Limit on a contribution-by-contribution basis). Businesses donating food inventory can qualify for deductions of 25%, up from 15%. This is applied to taxable income for C corporations. For S corporations, sole proprietorships and partnerships, it’s based on aggregate net income from all trades or businesses from which the contributions are made.
Student Loan Repayment Plan: There’s a credit for making student loan payments up to $6,000 per employee per year. This means you can exempt $6,000 per employee per year from income tax. For example, if you’re paying someone a $100,000 salary, you can take their salary down to $94,000 pay off $6,000 of their student loan. They don’t get taxed on that money and you don’t have to pay payroll taxes on that money either. You’re saving yourself and them money and paying off their student loan.
Estate Taxes: For tax year 2022, the estate tax exemption is $12.06 million for single filers and $24.12 million for joint filers.
Capital Gains Rates: The 15% and 20% brackets are the same. Limits increase to more than $445,800 to get into the 20% bracket (under is the 15% bracket).
Inflation Adjusted Tax Brackets: They all increased, but not by as much as inflation. The top bracket still 37%. Make sure you are filing in the correct state.
Mileage: If you’re self-employed, you can get a tax deduction for every mile you drive for business purposes. In 2021, the rate was 56 cents per mile, and in 2022, the rate rose to 58.5 cents per mile.
Deferred Social Security Taxes Due: For the 2020 tax year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to defer deposits of their portion of Social Security taxes that were due between March 27, 2020, and Dec. 31, 2020. However, in 2021, half of these deferred taxes became due by Dec. 31, 2021, with the remainder due Dec. 31, 2022. If you didn’t pay the first half on time, the IRS will consider all of the deferral invalid and will assess penalties on all of the deferred taxes using the original due date.
$600 1099 Requirement: Those who are self-employed already get a Form 1099-NEC from clients who pay them at least $600 a year, but if those clients are using Venmo, PayPal or a similar 3rd party payment platform to send the money, another tax form will be showing up for 2022.
Business interest expense rate returns to previous levels: Have a loan for your business? You may be able to deduct a portion of the interest from your tax bill. Exactly how much you can deduct is what’s changed. As part of previous pandemic relief tax law changes for businesses, the deduction limit was bumped up to 50% (from 30%) of the taxpayer’s adjusted taxable income. For 2021, the previous rule is no longer applicable and the 30% rate applies once again. Note this deduction limit only applies to certain businesses with gross receipts exceeding $26 million for 2021.
California AB 150: Essentially, this is California trying to get people to stay in California and pay taxes. They’re going to give you a deduction against your federal return, but the problem is it has a cap of 9%. The true tax benefit is the difference between 9% and 13% and the Federal return on that so at best you’re getting a 3.7% of 3% benefit.
Make sure you are consulting with your CPA on these tax law changes so you can make the best decisions for your business. The tax law is over 60,000 pages (and growing!), but how you choose to operate your business to get the most out of it is what’s important. At TGG, we can help you with tax planning or finding the right CPA, contact us for a free consultation today!
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