As we exit the first “post-COVID year,” it’s time to start thinking about 2022 tax filings this coming April.
As always this time of year, John D’Aquila, a certified public accountant and head of D’Aquila and Company LLP in Jacksonville, Fla., shared some of his year-end tax tips with me.
Manipulating deductions and income. When it comes to year-end tax planning, two rules never change: You should try to 1) accelerate as many deductions as possible to December 2022, and 2) postpone as much income as possible to January 2023.
If you know you will owe someone money early next year, ask them to submit their invoices now so you can mail payment before year-end. Better yet, if it’s a scheduled monthly payment, ask if it’s possible to pay the entire year in advance — they may even give you a discount for doing that.
Wait until Jan. 1 to mail out your invoices, unless a client (having read this column) asks you to send it now, in which case you probably should do that in the interest of good customer service.
Deductions for excess business losses. Taxpayers other than corporations can deduct excess farm losses and excess business losses through 2028. An excess business loss for the tax year is the excess of aggregate deductions attributable to your trades or businesses over the sum of your aggregate gross income or gain, plus a threshold amount. The threshold amount for 2022 is $270,000, or $540,000 for joint returns.
Pass-thru entity (llc and s corp) considerations. If you are operating a business through a pass-thru entity such as a partnership or S corporation, your basis in the entity must be high enough to allow for any loss deduction, if you have one for the year. In such a situation, talk to your accountant about ways you can legally increase your basis in such an entity.
Many states have enacted a pass-through entity tax for S corporations and LLCs with more than one owner. Deducting this tax on your federal income tax return, especially if your business is located in a state with high state and local taxes, can be a very significant tax savings for business owners.
Qualified business income deduction. If you are conducting your business as a sole proprietorship, a partner in a partnership, a member in an LLC taxed as a partnership, or as a shareholder in an S corporation, the qualified business income (QBI) deduction can significantly help reduce taxable income.
The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust dividends and qualified traded partnership income. A W-2 wage limitation amount may apply to limit the amount of the deduction.
The W-2 wage limitation amount must be calculated for taxpayers with a taxable income that exceeds a statutorily defined amount (i.e., the threshold amount). For any tax year beginning in 2022, the threshold amount is $340,100 for married filing joint returns and $170,050 for all other returns.
Since the QBI deduction reduces taxable income, and is not used in computing adjusted gross income, it does not affect limitations based on adjusted gross income such as the medical expense deduction or the calculation of social security income that is includible in income.
However, the QBI deduction does not apply to a “specified service trade or business,” which is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.
Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.
More funding for small business audits. Most of the benefits of the new federal Inflation Reduction Act for small business will, however, be outweighed by the Act’s appropriation of $80 billion for IRS tax enforcement activities such as hiring more enforcement agents, providing legal support and investing in “investigative technology.”
To be fair, the IRS was long overdue for funding, and roughly 45 percent of the appropriation is earmarked for improving taxpayer services, updating the IRS’ notoriously antiquated computer systems and other purposes that will be beneficial to taxpayers.
But it’s no secret that the principal motivation behind the increased funding is to reduce the almost $500 billion “tax gap” between the amount people are supposed to pay in taxes and the amount the IRS actually collects. This means more (and more aggressive) audits, and small businesses will be in the crosshairs.
Within the next year, the IRS will be hiring thousands of new auditors (mostly recent college and business school graduates with zero auditing experience) and handing them a bunch of small business tax returns on which they can cut their teeth. Here’s hoping yours won’t be one of them.
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