How to Simplify the Tax Season in 2022?
Running a business is hard enough without adding the complexity of filing taxes each year. The key, experts say, is to work with your accountant throughout the year, not just when you prepare your tax return. Making financial decisions without consulting an accountant or financial adviser can put you at risk and cost you more money in the long run, says John Blake, CPA, in Hamilton, N.J.
Deduct section 179 property
Small businesses can opt to deduct the full amount of certain property as expenses in the year the business began using them. This is referred to as section 179 property and can include up to $1,080,000 of eligible business property in the 2022 tax year. Some eligible deductions include:
Property used in manufacturing, transportation and production
Any type of facility used for business or research
Buildings used to hold livestock or horticultural products
Off-the-shelf computer software
Excluded:
Land
Investment property
Land outside of the U.S.
Buildings that provide lodging
Buildings that are used to store air conditioning or heating units
Bonus Depreciation: Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used. The new rules allow for 100% bonus “expensing” of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026 there is no further bonus depreciation. This bonus “expensing” should not be confused with expensing under Code Section 179 which has entirely separate rules, see above.
The 100% expensing is also available for certain productions (qualified film, television, and live staged performances) and certain fruit or nuts planted or grafted after September 27, 2017.
50% bonus first year depreciation can be elected over the 100% expensing for the first tax year ending after September 27, 2017.
TurboTax can assist you in choosing what types of property are appropriate deductibles.
Employment Tax
When you have employees, you have certain employment taxes you must pay and forms you must file. Employment taxes include the following:
Social security and Medicare taxes;
Federal income tax withholding; and
Federal unemployment (FUTA) tax.
You must also withhold Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year.
If you pay wages subject to federal income tax withholding or social security and Medicare taxes, you generally must file Form 941 quarterly; however, some employers use Form 944, Form 1040 (Schedule H), or Form 943 instead of Form 941. Generally you must use Form 940 to report your annual FUTA tax.
For additional information, refer to Employment Taxes for Small Businesses and Publication 15, (Circular E), Employer’s Tax Guide.
Excise Tax
You may be subject to Excise Tax if you do any of the following:
Manufacture or sell certain products;
Operate certain kinds of businesses;
Use various kinds of equipment, facilities, or products; or
Receive payment for certain services.
Excise taxes may be imposed on the manufacturer, retailer or consumer, depending on the specific tax.
These are the forms most commonly used to report excise taxes:
Form 720, Quarterly Federal Excise Tax Return, is used to report your liability by IRS Number. and pay the excise taxes listed on the form. If you report a liability on Part I or Part II, you may be eligible to use Schedule C to claim a credit.
Form 2290, Heavy Highway Vehicle Use Tax Return, is used to report federal excise tax on certain trucks, truck tractors, and buses used on public highways. This tax applies to vehicles having a taxable gross weight of 55,000 pounds or more.
Note: The weight declared for registering a vehicle in a state may affect the taxable gross weight used to calculate the tax.
Form 730, Monthly Tax Return for Wagers, is used by taxpayers in the business of accepting wagers, conducting a wagering pool or lottery, or required to be registered and received wagers for on behalf of another person but didn’t report that person’s name and address.
Form 11-C, Occupational Tax and Registration Return for Wagering, is used to register for certain wagering activity with the IRS and to pay the federal occupational tax on wagering.
Form 6627, Environmental Taxes, is used to report the environmental taxes on petroleum and imported petroleum products, and certain chemicals and imported chemical substances. Find the tax rates for 121 taxable substances here.
Deduct appreciable stock contributions
Many small businesses make charity contributions throughout the year and deduct the amount that’s donated. Ayoub suggests a way to maximize these contributions. “Donate appreciable stocks instead of money,” he advises. “Your business can deduct the current worth of the stock at the time of contributing, as opposed to what the stock was originally purchased (for).” For example, if you donate one share of a stock that you bought a year ago for $50 per share, and that stock is now worth $100 per share, you can deduct $100 at tax time. This gives you a deduction of the $50 you paid for the share plus the additional $50 that the share appreciated.
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. Estimated taxes are used to pay not only income tax, but other taxes such as self-employment tax.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally must make estimated tax payments if they expect to owe at least $1,000 in tax after subtracting withholding and tax credits. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.
Corporations generally must make estimated tax payments if they expect to owe at least $500 in taxes. Use Form 1120-W, Estimated Tax for Corporations, to figure your corporation’s estimated tax. You must deposit the payments using the Electronic Federal Tax Payment System. For additional information, refer to Publication 542, Corporations.
Take the qualified business income (QBI) deduction
The qualified business income (QBI) deduction trims eligible taxable income by 20%. It’s the ultimate self-employed tax deduction because you don’t have to do anything special to qualify. You just need a pass-through business.
The QBI spurs entrepreneurship by reducing a business owner’s taxable income. Check out the Ascent guide to the qualified business income deduction.
4. Carryover losses
Small businesses usually operate at a loss for the first few years. When your business starts to earn a profit, you can use prior business losses to lower your tax bill with the net operating loss (NOL) deduction.
You opened your business in 2019 when it brought in $100,000 in revenue and incurred $150,000 in operating expenses, creating a $50,000 NOL. You don’t pay income taxes on losses, but you can take a deduction up to $50,000 to offset income in years when you turn a profit.
If your business subsequently has taxable income of $75,000 in 2020, you’ll pay income tax on $25,000 ($75,000 taxable income – $50,000 NOL deduction).
The NOL deduction rules were loosened due to the COVID-19 pandemic. In 2020, you may carry back a loss, allowing for an immediate tax refund for a portion of taxes paid in the last five years. Check out our guide to the NOL for a how-to and other restrictions for future tax years.
5. Set up a retirement account
Whether you’re a solopreneur or have employees, you can get a tax benefit for contributing to or offering a retirement plan, like a 401(k) or IRA.
Solopreneurs are eligible to open a solo 401(k), also called a one-participant 401(k). Your contributions are tax-deductible up to a limit, but you’ll pay income tax on the contributions upon withdrawal in retirement.
Business owners can also participate in the same traditional 401(k) they offer to employees. Employee retirement plans can save your business on employer payroll taxes because they lower the amount of employee wages subject to the Federal Unemployment Tax Act (FUTA).
6. Take a home-office deduction
If you’re like me and working from home, you can qualify for another special deduction when you dedicate a portion of your home to your business.
There are two methods for calculating the home office deduction. The simpler way is multiplying the square footage used as your home office — not to exceed 300 square feet — by $5.
Alternatively, calculate the home office deduction by multiplying eligible home expenses by the portion of your home used for business. If your home office is 500 square feet of a 5,000 square-foot home, you could deduct 10% of eligible home expenses.
The biggest catch here is your home office can’t be multipurpose. You can use a velvet rope, silk room divider, or imaginary wall to cordon off a portion of your guest bedroom or basement to qualify as a home office, as long as you keep the office area strictly for business. Our guide to the home office deduction walks you through the rules, calculation, and filing process.
Maxim Liberty is a professional outsource bookkeeping service provider. We have a team of highly experienced CPAs who can record business expenses based on generally accepted accounting principles. The accounting statements prepared by our company can help your staff to prepare accurate cost accounting budgets and reports. You can contact us by dialing (703) 957-6938.
