Mid-year Tax Planning
Strategic Decisions Now Can Benefit You in the Long Run
It’s late June — time for, among things, thinking about your taxes. Actually, it’s time to do more than think about them. What’s needed is a hard look at matters ranging from business classification to expiring provisions to charitable donations, and then formulating strategies that will benefit you and your business for the long term.
By Kristina Drzal Houghton, CPA
Accountants spend a lot of time talking to clients during tax season about the importance of tax planning. Now is that crucial time. As we approach the halfway point of 2022, tax planning discussions should be underway for many businesses and individual taxpayers
Starting early is important but plans should consider that tax rules might change at the end of the year and businesses and individuals simply can’t afford to not prepare for those changes. Additionally, some COVID-19 relief programs are set to expire this year, therefore businesses should be ready to document appropriately and/or take advantage of potential savings. With so much probable change, it’s important to carefully consider your options and make strategic decisions that could benefit you in the long run.
As a small business owner, tax planning should be a key part of your overall financial strategy. By taking advantage of tax breaks and deductions, you can minimize your tax liability and keep more money in your pocket. Here are nine strategies you should consider:
Review your tax liability for the current year
EventTake a look at your tax situation for the current year and estimate how much tax you will owe. This will help you determine if you need to make any changes to your withholdings or estimated tax payments.Event
Consider a tax status changeEventYour entity type not only impacts how you are protected under the law but it also affects how you are taxed. If you’ve outgrown your current business structure, or if you previously set up a structure that wasn’t the best fit for your business, you can elect to change your structure. Each entity type has its own benefits and drawbacks, so it is important to make sure you have a full picture before committing to your decision.
Amortization of research and experimental (R&E) expenditures
Due to law changes, companies are no longer allowed to fully deduct their R&E expenses. Instead, these expenses are amortized over a period, based on where their services are provided. Classification of expenses as R&E should be renewed.Event
Review expired provisions
Some of the tax relief provisions in 2021 the American Rescue Plan Act (ARPA) were carried over into 2022 by the Build Back Better Act. Principal among them are ARPA’s increases and expansion of the child tax credit, including its monthly advance payments, which have now ended as of the December 2021 payment. The Build Back Better Act was signed into law this past March 11 and included a renewal of that provision for 2022. Beyond those expiring provisions, a number of pre-ARPA “extender” items lapsed at the end of 2021, such as the treatment of premiums for certain qualified mortgage insurance as qualified residence interest and multiple energy and fuel credits.Event
Review the new limit on state and local tax deductions
For individual taxpayers, one of the biggest potential changes being lobbied is the possible restoration of the deduction for state and local taxes (SALT). If this proposal becomes law, it could have a major impact on your tax bill. As such, it’s important to think about how you would adjust your tax planning if the SALT deduction is restored or remains limited. Additionally, there are a number of other proposed changes to the tax code that could impact individuals, so it’s important to stay up-to-date on the latest developments and plan accordingly.Event
Consider the Qualified Business Income (QBI) Deduction
The qualified business income (QBI) deduction, which provides pass-through business owners a deduction worth up to 20% of their share of the business’s qualified income. However, this deduction is subject to a number of rules and limitations. For example, owners of specified service trades or businesses (SSTBs) are not eligible for the deduction if their income is too high. SSTBs generally include any service-based business, such as a law firm or medical practice, where the business depends on its employees’ or owners’ reputation or skill. If a business is eligible for a QBI deduction, owners should carefully weigh salary vs. flow through income.Event
Budget for larger charitable donations
Finally, if you’re thinking of making a charitable donation, recently you may not have benefited as much from the deduction for your donation as you have in the past. Since the TCJA nearly doubled the standard deduction started effective 2018 and capped the SALT deduction, fewer people itemize their deductions on their tax return.
As a result, the tax benefits of charitable donations have been limited to those who itemize their deductions. If the SALT cap is increased or eliminated, the deduction for charitable contributions could be more beneficial. If you are considering more significant contributions, gifting appreciated stuck to qualified charities offers great benefits. You will get a tax deduction for the fair market value and not be taxed on the unrealized gain. Event
Remember, meals and entertainment are still 100% deductible.
For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. (The limit is usually 50% of the cost.)
Review your accounting methods and records
It’s a great time to look at the books, and make a plan to adjust anything that should be changed while also planning for the future. Many times, unexpected changes come up that can impact your business and individual taxes that you may not have even considered. For example, will you have any major life changes, such as getting married or having a baby? Buying a house? Leasing a business vehicle? Hiring more employees? Relocating your business? Spending more than usual on talent acquisition? Investing or accepting cryptocurrency? These changes can have a significant impact on your tax liability.
No matter what changes are ultimately enacted into law, the key to successful tax planning is staying informed and being proactive. By taking the time to understand the potential implications of proposed changes and making strategic decisions now, you can help ensure a smooth tax season for yourself and your business in 2022.
Kris Drzal Houghton is a partner at the Holyoke based accounting firm, Meyers Brothers Kalicka, P.C.