Tax Tips for Businesses Edit as AdminQualified Business Income Deduction: In general, The Tax Cuts and Jobs Act allows a 20% deduction on qualified business income from partnerships, LLCs, S-Corporations, trusts, estates and sole proprietorships. For 2022, the deduction is subject to limitations for certain businesses where individual taxable income is $170,050 or more filing single, and $340,100 or more if filing joint. When income exceeds these thresholds, the calculation becomes more complex, certain types of service businesses lose the deduction, and there is a phase-out range.
Section 179 Deduction: This special election allows eligible businesses to deduct the full cost of annual asset acquisitions instead of taking ordinary depreciation. A business can expense up to $1,080,000 for the year 2022. Phase-out of the deduction begins when acquisitions for the year exceed $2,700,000. The Section 179 deduction is limited to the amount of taxable income from the taxpayer's active trade or business. Some classes of property are not eligible. However, The Tax Cuts and Jobs Act, signed on December 22, 2017 expands the definition of qualifying property to include certain improvements made to nonresidential real property.
Bonus Depreciation: For assets placed in service after September 27, 2017, taxpayers can take a depreciation deduction of 100% of the cost of eligible property in the year placed in service. Used property now qualifies for bonus depreciation as long as the taxpayer did not previously use the property before acquiring it.
UPDATES & OTHER TIPS
Profit-sharing Plans: Unlike other plans, a profit-sharing plan is flexible. The plan can be designed so that the employer or plan sponsor is not required to make an annual contribution. The amount can be left to the company's discretion. Often, a profit sharing plan type provision is included in a company 401(k) Plan.
401(k) Contributions: For 2022 the maximum employee elective deferral is $20,500. If you are age 50 or older, you can defer an additional $6,500. The amounts increase to $22,500 and $7,500 respectively for 2023.
Social Security Wage Cap: The Maximum Amount of Wages Subject to the Social Security Tax for 2022 is $147,000 and $160,200 for 2023. There is no limit on the amount of wages subject to the Medicare tax.
Hiring Your Children: If you have your own business, you should consider hiring your child to work after school or on vacations. The wages you pay your child for bona fide work are tax deductible. Your child will probably pay less in taxes than you would pay. In fact, the income could be considered tax free if the amount is less than your child's standard deduction. For 2022, a dependent child can take a standard deduction of the greater of $1,150 or the sum of $400 plus the child’s earned income, up to the applicable standard deduction of $12,950. For 2023, the amounts will be $1,250/$400/$13,850.
Business Automobiles: You can claim deductions for the business-related use of an auto using either the standard mileage rate method or the actual expense method. You should use the method that will yield the largest deduction. However, once you've claimed accelerated depreciation for a business car in prior years under the actual expense method, you cannot switch to the standard mileage rate method for that car in a subsequent year. The Standard Mileage Rate for business driving increased to 58.5 cents per mile effective January 1, 2022 and increased again on July 1, 2022 to 62.5 cents per mile. If you use the standard mileage rate, you can separately deduct business parking fees and tolls, and any business portion of state and local personal property taxes. A business may also deduct its portion of loan interest.
Home Office Expenses: To qualify for a deduction related to an office in the home, you must have an area of your home used exclusively as your principal place of business. This includes a place of business where you meet or deal with patients, clients, or customers. A separate unattached structure that you used in connection with a business may also be eligible for the deduction. Space in your home used exclusively and regularly for administrative and management activity of your trade or business may be eligible for a home office deduction. However, you cannot have another fixed location where you conduct substantial administrative or management activities of the trade or business. Deductible expenses are proportionate to the space used for the business activity. Taxpayers may take an alternate safe harbor deduction of $5 times the home office square footage, up to 300 square feet.
Business Meals: Businesses can deduct 100% of business meals in 2021 and 2022. This includes client meals as well as meals for employees on business travel.