Effective year-end tax planning strategies can help businesses manage tax liability, maximize cash flow, and preserve wealth, and it is important for business owners to not wait until the last minute. With many popular tax planning strategies potentially being eliminated as Congress continues to go back and forth on the proposed changes, many are waiting to implement any year-end strategies until final legislation is released but that puts businesses in a tough spot. Here are some potential moves to consider looking ahead to 2022 based on the current landscape:
Be proactive and be prepared
Tax planning should be something business owners evaluate throughout the course of the year. Proper timing can maximize these year-end strategies and income/deductions could become even more valuable. Businesses would be wise to not make major tax planning decisions based on government proposals but should still be aware of how the potential changes may affect tax planning and be ready to pivot. The details of the new tax legislation are still being negotiated in Congress and should be monitored, but don’t base all year-end strategies around the possible implementation of proposed changes.
Review entity structure
As a business evolves its structure may also change, this is an item that should be reviewed as growth occurs or there are ownership changes. It is important to discuss this matter with your advisors to consider the benefits of an S-Corp, C-Corp, LLC, Partnership, etc. and make the most advantageous decision for the business. It is not uncommon for businesses to utilize multiple structures to manage liabilities.
Evaluate retirement plans
Establishing a retirement plan is one of the most effective methods for businesses to decrease taxes. There is a wide variety of retirement plans and plan structures, and some may make more sense than others depending on the business. Small businesses can potentially defer income taxes on hundreds of thousands of dollars per year with the right plan. Don’t leave money on the table. Our Wealth Management team may help identify strategies to get more dollars into your column.
Be mindful of internal accounting
Managing the record keeping of a business is not just a task that needs to be done when it is time to file taxes, especially for businesses that are more complicated. Invest in bookkeeping resources, this could mean software implementation or someone to manage the books. Waiting until tax season to clean up the books could cost businesses dearly. Some of our clients have chosen to outsource some or all of their internal accounting function. Contact UHY Client Accounting Advisory Services for more information.
Utilize first-year bonus depreciation
The Tax Cuts and Jobs Act afforded businesses the luxury of claiming 100% first-year bonus depreciation for qualified use and new property that was placed into service during the 2021 business year. In layman’s terms businesses may be able to get a tax break for the entire cost of assets purchased during the business year. This strategy applies to some business acquisitions taxed as asset deals. Bonus depreciation may also be applied to some building improvements and building acquisitions. Our cost segregation specialists are ready to provide this analysis.
Research and development tax credit
Many middle market businesses don’t realize they are eligible for this lucrative tax credit. From seasoned manufacturing companies to dental offices, this credit is available to all companies performing research and development within the United States and should be considered along with other tax planning items. Contact our research and development (R&D) tax credit specialists for assistance in determining allowable tax credit, and help substantiating this tax strategy with the proper documentation required to withstand IRS scrutiny.
Income and expense timing
Accelerating expenses into the current tax year and deferring income until the next year is a tried-and-true tax reduction strategy for businesses that use cash-basis accounting. These businesses might, for example, delay billing until later in December than they usually do, stock up on supplies and expedite bonus payments.
But the strategy is advised only for businesses that expect to be in the same or a lower tax bracket the following year — and you may expect greater profits in 2022, as the pandemic hopefully winds down. If that’s the case, your deductions could be worth more next year, so you’d want to delay expenses, while accelerating your collection of income. Moreover, under some proposed provisions in the BBBA, certain businesses may find themselves facing higher tax rates in 2022.
For example, the BBBA may expand the net investment income tax (NIIT) to include active business income from pass-through businesses. The owners of pass-through businesses — who report their business income on their individual income tax returns — also could be subject to a new 5% “surtax” on modified adjusted gross income (MAGI) that exceeds $10 million, with an additional 3% on income of more than $25 million.
Not every tax-cutting tactic has to be dry and dull. One temporary tax provision provides an incentive to enjoy a little fun.
For 2021 and 2022, businesses can generally deduct 100% (compared with the normal 50%) of qualifying business meals. In addition to meals incurred at and provided by restaurants, qualifying expenses include those for company events, such as holiday parties. As many employees and customers return to the workplace for the first time after extended pandemic-related absences, a company celebration could reap you both a tax break and a valuable chance to reconnect and re-engage.
Don’t do it alone!
Running a business is a monumental undertaking in itself, without having to consider all of the external factors. It is important for business owners to be aware and knowledgeable of anything that can impact their business, but it is even more important to turn to the advice of specialists to maximize performance and revenue.