🔒Policy shifts, macroeconomics dominate year-end small business tax strategies

With just weeks left in the year, businesses can still take actions that will benefit their 2022 tax position. These strategies fall into two categories.

Managing uncertainty in the economy

While 2022 has been yet another tumultuous year, many companies performed well, in some cases 15% to 20% better than 2021.

These companies likely have profit they can look to offset to decrease tax liability in the short term and make investments they may be happy to have if 2023 proves rocky.

This is a great year to invest in your team. Recruiters are working overtime and talent at every level continues to leave for other employers and higher pay.

If you have the cash to do it, adding to your employees’ 401(k) or increasing bonuses this year can offset your tax liability for 2022 and possibly save you major staffing headaches in 2023.

It’s no secret that prices went up in 2021 and 2022, and everything from materials, equipment and vehicles are likely to continue to get more expensive next year. Making capital investment purchases now will likely produce both cost savings and tax savings.

However, with continued supply chain disruptions, you have to be comfortable with potentially extreme delays. One client ordered several trucks in March with an estimated delivery date of September. That timeline has now been pushed back to March of 2023.

Awareness of shifting tax policies

While there aren’t any blockbuster tax changes between 2022 and 2023, there is movement in a number of areas.

For some companies, these shifts could guide decision-making that will have significant tax implications.

Business meals: Taking your clients or employees out to lunch right now will produce twice the write-off than it will in January.

Normally, there’s a 50% limit to business-meal deductions. This was waived for 2021 and 2022, making 100% of allowable food and beverages provided by a restaurant deductible.

Bonus depreciation: New assets, such as computers, machinery, vehicles and even fruit-and-nut-producing plants acquired and put into service in 2022 can be fully depreciated on your 2022 tax return. This is known as “bonus depreciation” and gives the full tax benefit of a new investment immediately instead of over a period of five or seven years.

In 2023, bonus depreciation drops to 80% of the asset’s value, and it’s set to continue to drop 20% per year through 2027.

Carry forward losses: While in recent years net operating losses could be carried back, as of last year they can only be carried forward. In addition, the net operating loss deduction is limited to 80% of taxable income.

In other words, if you’re carrying a loss forward, it can only offset 80% of your income — you’ll still owe taxes on the other 20%. Business owners with large losses to claim could be caught off guard that they still owe income tax.

Social Security tax deferrals are due: As part of pandemic-relief measures in 2020, the IRS allowed companies to defer the employer portion of the Social Security tax to 2021 and 2022.

The 2022 payment (typically half the 2020 employer portion of the Social Security tax) is due Dec. 31, 2022.

Undoubtedly, some companies that took this deferral have forgotten about it and will be surprised by the IRS letter requesting it.

Jim Arcouette and Bill Slattery are CPAs in the tax services practice at Connecticut accounting and advisory firm Fiondella, Milone & LaSaracina LLP (FML CPAs).