Privately-Owned Businesses

Listing home vacation rental tax impacts

Listing your home as a vacation rental? Here are the tax impacts to watch for
Listing your home as a vacation rental? Here are the tax impacts to watch for 850 500 smolinlupinco

Whether in the mountains or a waterfront community, many Americans dream of owning their perfect vacation home. If you already own a second house in a desirable area, you might consider renting it out for part of the year.

Before you post that listing, though, take a moment to learn about the tax implications. Taxes for these transactions can be complicated. They are determined based on how many days the home is rented, as well as a few other factors.

Vacation use by yourself and family members (even if you charge them rent) may impact that amount of taxes you pay. Use by nonrelatives will also affect your rate if market rent isn’t charged.

Tax rates for short-term rentals

Did you know that if you rent a property out for less than 15 days during the year, it’s not treated as “rental property” at all? For tax purposes, any rent you receive for this timeframe won’t be included in your income. This can lead to revenue and significant tax benefits in the right circumstances.

There is a drawback to this, though. You can only deduct property taxes and mortgage interest—not depreciation or operating costs. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

Tax rates for longer rentals

You must include rent received for property rented out more than 14 days in your income for tax purposes. In this scenario, you may deduct part of your depreciation and operating expenses (subject to certain rules). 

However, navigating the numbers can prove challenging. You must allocate which portion of certain expenses are incurred via personal use days vs. rental days, such as: 

  • Maintenance
  • Utilities
  • Depreciation allowance 
  • Taxes
  • Interest

Both the personal use portion of taxes and the personal use part of interest on your second home may be deducted separately. To be eligible, the personal use part of interest must exceed the greater of 14 days or 10% of the rental days. Depreciation on the personal use portion of time is not deductible. 

Losses may be deductible

If allocable deductions are lower than your rental income, you must report the deductions and the rent to determine the amount of rental income you should add to your other income. If expenses exceed the income, it may be possible to claim a rental loss.

The number of days you use the house for personal purposes is important here. If you used the home for more than the greater of 14 days or 10% of the rental days, you used it “too much” to claim your loss.

In this instance, you may still be able to wipe out the rental income using your deductions. However, you can’t create a loss. Deductions you can’t claim will be carried forward, and you may even be able to use them in future years. 

If you can only deduct rental expenses up to the amount of rental income you received, you must prioritize the following deductions:

  • Interest and taxes
  • Operating costs
  • Depreciation

Even if you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, though, rental deductions that exceed rental income may be claimed as a “passive” loss (and will be limited under passive loss rules.) 

Questions? Smolin can help.

Tax rules regarding vacation rental homes can be confusing. We only discuss the basic rules above, and additional rules may apply to you if you’re considered a small landlord or real estate professional.

That’s why it’s best to consult with a tax professional before planning your vacation home use. Contact the friendly tax experts at Smolin to learn more.

Key Q4 Deadlines Employers Businesses

Key Q4 Deadlines for Employers and Businesses 
Key Q4 Deadlines for Employers and Businesses  850 500 smolinlupinco

In the fourth quarter of 2023, businesses and employers should be aware of these key tax-related deadlines.

(Note: Additional deadlines may apply. Please contact your accountant directly to ensure you’re meeting all filing requirements.) 

While certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas, the following dates act as a general guideline: 

October 2 (Monday): Final day to set up a SIMPLE IRA plan

If you (or a predecessor employer) did not previously maintain a SIMPLE IRA plan, October 2nd is the final day to initially set up one.

Exception: If you’ve become a new employer after October 1st, you can establish a SIMPLE IRA as soon as administratively feasible after your business is established. 

October 16 (Monday): C Corporations and automatic six-month extensions

If you run a C corporation, this is your final date to:

  • Establish and contribute to a SEP for 2022, (if an automatic six-month extension was filed)
  • Make contributions to certain employer-sponsored retirement plans for 2022
  • File a 2022 income tax return (Form 1120) and settle any remaining tax, interest and penalties due.

October 31 (Tuesday): 3rd quarter reporting

This is the last day to report third-quarter 2023 income tax withholding and FICA taxes using Form 941 and pay any remaining tax due.

(See exception below under “November 13.”)

November 13 (Monday): Exception for 3rd quarter reporting

If you deposited on time (and in full) all of the associated taxes due, this is the last day to report income tax withholding and FICA taxes for third quarter 2023 using Form 941. 

December 15 (Friday): 4th installment of 2023 estimated income taxes

Calendar-year C corporation must pay the fourth installment of 2023 estimated income taxes by this date.

Questions? Smolin can help.

For more information about filing requirements and personal guidance on the deadlines applicable to your business, contact the friendly accountants at Smolin.

Running business spouse Tax issues

Running a business with your spouse? Watch out for these tax issues.
Running a business with your spouse? Watch out for these tax issues. 850 500 smolinlupinco

For many spouses who run a profitable, unincorporated small business together, filing taxes can be confusing.

Here are some of the most common challenges to look out for.

Classification: the partnership issue

In many cases, the federal government classifies unincorporated businesses owned by two spouses as a partnership. This means you’ll need to file an annual partnership return on Form 1065.

In order to allocate the partnership’s taxable income, deductions, and credits, you and your spouse must also both be issued separate Schedule K-1s.

Once that paperwork is covered, you should also expect to complete additional compliance-related tasks. 

Calculating self-employment (SE) tax 

The government collects Medicare and Social Security taxes from self-employed people via self-employment (SE) tax.

This year, you should expect to owe 12.4% for Social Security tax on the first $160,200 of your income, as well as an additional 2.9% Medicare tax.

Beyond that $160,200 ceiling, you won’t owe additional Social Security tax. But the 2.9% Medicare tax component continues before increasing to 3.8%—thanks to the 0.9% additional Medicare tax—if the combined net SE income of a married couple that files jointly exceeds $250,000.

You must include a Schedule SE with your joint Form 1040 to calculate SE tax on your share of the net SE income passed through to you by your spousal partnership. In addition, you’ll need to submit a Schedule SE for your spouse to calculate their share of net SE income.

All in all, this can result in a larger SE tax bill than you might expect.

For example, say you and your spouse each have a net SE income of $150,000 ($300,000 total) in 2023 from your profitable 50/50 partnership business. The SE tax on your joint tax return is a whopping $45,900 ($150,000 x 15.3% x 2). That’s on top of regular federal income tax.

Potential tax saving solutions

Option 1: Minimize SE tax in a community property state via an IRS-approved method

IRS Revenue Procedure 2002-69 allows you to treat an unincorporated spousal business in a community property state as a sole proprietorship operated by one of the spouses for tax purposes.

This allocates all of the net SE income to one spouse, so that only the first $160,200 of net SE income from your business will be subject to the 12.4% Social Security tax.

This can dramatically reduce your SE tax bill.

Option 2: Make your business into an S-Corp that pays you and your spouse modest salaries as shareholder-employees

If you don’t live in a community property state, you still have options. By converting your business to an S-Corporation, you can lessen the amount of Social Security and Medicare taxes you’ll owe.

Only the salaries paid to you and your spouse will be hit by the Social Security and Medicare tax, collectively called FICA tax. From there, you can pay out most or all remaining corporate cash flow to yourselves as FICA-tax-free cash distributions. 

Option 3: End your partnership and hire your spouse as an employee

For some couples, running the operation as a sole proprietorship operated by one spouse may make more sense than continuing with a spousal partnership.

In this scenario, you’d hire your spouse as an employee of the proprietorship with a modest cash salary and withhold 7.65% of that salary to cover their share of the Social Security and Medicare taxes. The proprietorship must also pay 7.65% as the employer’s half of the taxes.

As long as the employee-spouse’s salary is modest, the FICA tax will also be modest.

With this strategy, you file only one Schedule SE with your joint tax return (for the spouse treated as the proprietor). A maximum of $160,200 (for 2023) will be exposed to the 12.4% Social Security portion of the SE tax.

Questions? Smolin can help.

If you’re looking for tax-saving strategies for your small business, contact Smolin. We’ll help you determine how to minimize compliance headaches and high SE bills so you can get back to running your business with less tax-induced stress.

Which Vehicles Are the Most Tax-Friendly for Business Owners?
Which Vehicles Are the Most Tax-Friendly for Business Owners? 850 500 smolinlupinco

If your business is preparing to replace a vehicle or buy a new one, you should know that a heavy SUV might provide a more substantial tax break this year than what you’d receive from a smaller vehicle. 

The reason? Larger business vehicles are depreciated differently on your tax returns than smaller ones. 

Depreciation guidelines

Compared to other depreciable assets, business vehicles are subject to more restrictive tax depreciation rules. 

Depreciation deductions are automatically capped under “luxury auto” rules. If a taxpayer decides to use Section 179 of the Internal Revenue Code to expense all or part of the cost of a vehicle, these caps can apply here as well, allowing an asset to be written off in the year it’s placed into service. Included in these rules are smaller trucks and vans built on truck chassis. 

For most vehicles that are subject to these caps and begin service in 2023, the expensing deductions or maximum depreciation are as follows:

  • First tax year in recovery period – $22,200
  • Second tax year – $19,500
  • Third tax year – $11,700
  • Every subsequent year – $9,960

Typically, this extends the number of years it takes to depreciate the business vehicle completely. 

Caps on deductions

Caps on expensing deductions and annual depreciation for passenger vehicles don’t apply to trucks or vans that weigh more than 6,000 pounds. This rule also includes large SUVs, which can sometimes cost over $50,000, so from a tax timing perspective, you may be better off replacing your business vehicle with a heavy SUV to avoid the restrictions on smaller cars.

In most instances, you’ll have the ability to write off a substantive amount of the cost of a heavy SUV that’s used for business purposes by taking advantage of the bonus and regular depreciation beginning from the year you put the vehicle into service. Bonus depreciation is currently available at 80% but will be reduced to zero over the coming years.

If you opt to expense all or part of the cost of a heavy SUV using Section 179, it’s essential to be aware that as of 2023, an inflation-adjusted limit of $28,900 (up from $27,000 in 2022) applies separately from the caps listed above. 

Please note that for all assets you elect to expense in a year, there’s an aggregate dollar limit that applies. Once you’ve completed the expensing election, you’ll need to depreciate the rest of the cost under the standard rules without regard to annual caps. 

It’s also important to be aware that the tax benefits listed above are subject to adjustment for non-business use. Additionally, the vehicle won’t be eligible for expensing if the business use of the SUV doesn’t exceed 50% of total use, meaning it would be required to be depreciated on a straight-line method over a period of six tax years.  

Trust your tax questions to Smolin

If you have questions or would like assistance with your tax return, the CPAs at Smolin can help. Contact us for more information about how to get the most tax write-offs from your company vehicle this tax season.

business-related-tax-limits-have-increased-for-2023

Business-Related Tax Limits Have Increased for 2023
Business-Related Tax Limits Have Increased for 2023 1488 875 smolinlupinco

A variety of tax limits that affect businesses are indexed on an annual basis. As a result of high inflation, many of these limits have increased more than usual for 2023. 

Here are a few that businesses should keep in mind for 2023:  

Social Security tax

For 2023, the amount of employee earnings subject to Social Security tax is capped at $160,200 (compared to $147,000 in 2022). 

Deductions

For Section 179 expensing, the limit has increased to $1.16 million (compared to $1.08 million), with a phaseout of $2.89 million (compared to $2.7 million).

Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at $364,200 for married couples filing jointly (compared to $340,100). For other filers, this amount is $182,100 (compared to $170,050). 

Retirement plans

Increases for retirement plans are as follows: 

401(k) plans

  • Employee contributions: $22,500 (compared to $20,500) 
  • Catch-up contributions: $7,500 (compared to $6,500) 

SIMPLE plans

  • Employee contributions: $15,500 (compared to $14,000) 
  • Catch-up contributions: $3,500 (compared to $3,000) 

Additional increases

  • Employer/employee contributions to defined contribution plans, not including catch-ups: $66,000 (compared to $61,000) 
  • The maximum compensation used to determine contributions: $330,000 (compared to $305,000) 
  • The annual benefit for defined benefit plans: $265,000 (compared to $245,000) 
  • The amount used to define a highly compensated employee: $150,000 (compared to $135,000) 
  • The amount used to define a key employee: $215,000 (compared to $200,000) 

Additional employee benefits

The qualified transportation fringe-benefits employee income exclusion is $300 monthly (compared to $280). 

Flexible Spending Account (FSA) healthcare contributions have increased to $3,050 (compared to $2,850). Note that the dependent care contribution limit of $5,000 has remained the same. 

Health Savings Account (HSA) contributions have increased as follows: 

  • Individual coverage: $3,850 (compared to $3,650) 
  • Family coverage: $7,750 (compared to $7,300) 

The catch-up contribution limit of $1,000 has remained the same. 

Questions? Smolin can help 

These are only some of the tax limits and deductions that could affect your business—and additional rules could apply. If you have questions, our CPAs can help. Contact us to get started. 

7-ways-secure-act-could-affect-your-small-business

7 Ways SECURE 2.0 Could Affect Your Small Business
7 Ways SECURE 2.0 Could Affect Your Small Business 1600 942 smolinlupinco

Does your small business have a retirement plan? Even if it doesn’t, you may start to see beneficial changes as a result of the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0), which was signed into law in December 2022. 

Built upon the original SECURE Act of 2019, SECURE 2.0 will take effect over several years. Some of its provisions may affect small businesses. 

1. Automatic retirement plan enrollment

The SECURE 2.0 law will require 401(k) plans beginning after December 31, 2024, to automatically enroll employees once they become eligible (though employees will have the choice to opt out). 

The initial automatic enrollment amount would be between 3-10%, with the amount increasing by 1% each year until it reaches between 10-15%. 

Note that all current 401(k) are grandfathered into the act, and certain small businesses may be exempt. 

2. Coverage for part-time employees

The original SECURE Act requires that employers allow part-time employees to participate in their 401(k) plans, provided they meet one of the following requirements:

  1. One year of service and at least 1,000 hours worked, OR
  2. Three consecutive years of service with at least 500 hours worked 

Beginning after December 31, 2024, SECURE 2.0 will reduce the three-year rule to two years. It will also extend the long-term, part-time coverage rules to ERISA 403(b) plans. 

3. Matching contributions for employees with student loan debt

Under SECURE 2.0, employers will be allowed to make matching contributions to 401(k)s and certain other retirement plans for “qualified student loan payments.” 

This means that, after December 31, 2023,  your employees who cannot afford to save for retirement due to student loan debt repayments will still be able to receive matching employer contributions into their retirement plans. 

4. “Starter” 401(k) plans

The SECURE 2.0 law will allow employers that don’t sponsor retirement plans to offer “starter” 401(k) plans—or safe harbor 403(b) plans—to employees. This would require all employees to be enrolled at a 3-15% of compensation deferral rate by default. 

The annual deferral limit would be the same as the IRA contribution limit, with an additional $1,000 in catch-up contributions beginning at age 50. This provision will take effect starting December 31, 2023. 

5. Pension plan tax credit

As of December 31, 2022, SECURE 2.0 increases the tax credit for eligible small employer pension plan start-up costs. This incentivizes businesses to establish and offer retirement plans. 

6. Higher catch-up contributions

Participants in certain retirement plans can currently make additional catch-up contributions once they reach age 50 or older, with a limit of $7,500 for 401(k) plans in 2023. With SECURE 2.0, this catch-up contribution limit will increase to the greater of $10,000 or 150% of the regular amount for individuals between the ages of 60-63. 

This provision will take effect for taxable years beginning after December 31, 2024, with increased amounts being indexed for inflation after December 31, 2025. 

The catch-up amounts for SIMPLE plans will also increase. 

7. Military spouse tax credit

Effective in 2023, SECURE 2.0 offers a new tax credit for eligible small employers for each military spouse participating in their defined contribution plan. 

Questions about how the SECURE 2.0 law could affect your small business? Contact us

These are only some of the changes resulting from SECURE 2.0. If you have questions about how the new law could affect your small business, our CPAs can help. Contact us to get started. 

5-ways-to-update-your-accounting-practices

5 Ways to Update Your Accounting Practices
5 Ways to Update Your Accounting Practices 1594 938 smolinlupinco

When you think about the internal workflows and processes of your business, are you able to pinpoint why you do things a certain way? If the answer is “because we’ve always done it that way,” it might be time to make some changes. 

In fact, with all of the new developments in the financial and accounting realm, sticking to those traditional methods may actually be costing your business in terms of efficiency and cash flow alike. 

Here are five ways to keep your accounting processes and systems up-to-date. 

1. Streamline the payables process

When it comes to managing your accounts payable, using traditional paper processes could be costing you valuable time (and money). With automated technology solutions, you can streamline the process to improve efficiency, reduce costs, enhance security, and even obtain early payment discounts. 

Automatic payables systems can scan invoices and post them automatically based on the purchase or invoice number. Then, the payables clerk—or whoever is responsible for reviewing the invoice—can cross-reference the invoice and approve it for electronic payment based on terms negotiated with the vendor. 

2. Implement daily reconciliation

Many accounting firms wait until the end of the month to reconcile their bank accounts—but it doesn’t have to be this way. By reconciling accounts on a daily basis using automation software, you can catch in-transit payments that have been cashed but not recorded. And by eliminating that crunch at the end of the month, you can speed up other monthly closings. 

This also keeps you from having to wait for standard monthly entries that remain the same—depreciation, prepaid expenses, and property tax or insurance accruals, for example. By starting your end-of-month closing process sooner, you can improve the accuracy and timeliness of your financial statements while also taking some of the pressure off of your accounting staff. 

3. Use p-cards

Consider issuing corporate purchase cards, or p-cards, to at least one employee in each department to cover travel and entertainment expenses, or small items under $100 or so. This way, your accounting department can make a single payment for multiple purchases, rather than processing multiple small-dollar checks. 

As an added perk, most p-cards offer points and cash-back rewards that your team can take advantage of when paying back expenses. 

4. Digitize your processes

When you go paperless, you can lower expenses, increase efficiency, and maintain compliance—all in a way that’s more environmentally friendly. And when you use an electronic document management system, you can save significant amounts of physical storage space and reduce the time it takes to create and modify documents. 

While you may not be able to go completely paperless, there are plenty of documents and processes that can be digitized: contracts, invoices, payables, payroll documents, and employee records, for example. 

Consider implementing document management software solutions to help you convert your processes from paper to digital. 

5. Make the most of your accounting software

With ever-changing policies and practices, it’s more important than ever to use your accounting software to help you stay compliant and financially sound. This could involve making better use of your current account system or switching over to new software. Keep in mind that, as your firm grows, you will likely need more advanced functionality. 

To optimize your accounting software, start by making a list of your requirements, from types of activities to reporting. Then, cross-reference those needs with your software features to ensure that they’re all being met. You’ll also want to prioritize remote access so that your team can securely access real-time project information from anywhere. 

Look for integrations with other software and platforms, too, such as timecard entry and project management software, or third-party payroll software that can be used with minimal manual data entry.

Ready to upgrade your accounting practices? 

If your accounting firm’s processes and systems have been the same for years, it’s likely time for an upgrade—and our knowledgeable accounting advisers can help. Contact us to learn more.

pros-and-cons-of-c-corporations-for-business-entities

Pros and Cons of C Corporations for Business Entities
Pros and Cons of C Corporations for Business Entities 1275 750 smolinlupinco

If you’re launching a new business venture, you may find yourself wondering which type of company to create—and more specifically, whether a C corporation is the right option for you given your unique situation and goals. There are many advantages and disadvantages of doing business as a C corporation that are important to consider. 

What is a C corporation?

As a C corporation, your business is treated and taxed separately from you as its principal owner (unlike with an LLC). This protects you from the debts of business while also allowing you to control day-to-day operations and corporate acts like redemptions, acquisitions, and liquidations. 

As an added perk, the corporate tax rate is currently 21%—lower than the highest non-corporate tax rate. 

How to ensure your corporation is treated as a separate entity

For your business to be treated and taxed separately from you as an individual, you must follow the legal requirements of your state. For example: 

  • Filing articles of incorporation
  • Adopting bylaws
  • Electing a board of directors
  • Holding organizational meetings
  • Keeping meeting minutes

Compliance with these requirements, along with the maintenance of an adequate capital structure, will keep you from risking personal liability for business debts.

Pros and cons of C corporations 

If you’re unsure whether a C corporation is the right legal structure for your business, it’s important to explore both sides of this model. 

Advantages

On a tax-favored basis, a C corporation can be used to provide fringe benefits and fund qualified pension plans. While subject to certain limitations, the corporation can deduct various benefit costs (such as health insurance and group life insurance) without negative tax consequences. 

When it comes to raising capital from outside investors, a C corporation also offers significant flexibility—it can have multiple classes of stock, each with different rights and preferences that can be tailored to the needs of an individual along with potential investors. For those who decide to raise capital through debt, interest paid by the corporation is deductible. 

Disadvantages

Since it’s taxed as a separate entity, all of the corporation’s items of income, credit, loss, and deduction are calculated at the entity level, arriving at taxable corporate profit or loss. This means that, for new businesses, one potential disadvantage of a C-corp is that losses can be trapped at the entity level and not deducted by owners (unless they expect to generate profits in the first year). 

Another potential disadvantage is that C corporation earnings can be subject to double taxation: once at the corporate level, and again when distributed to you. That said, this risk is minimal, since most corporate earnings will be attributed to your efforts as an employee and the corporation can deduct all reasonable salary paid to you. 

Not sure if a C corporation is the right choice? Contact us.

While a C corporation might be the appropriate choice at this time, you may be able to apply to become an S corporation in the future if it’s more appropriate for your business. 

If you have any questions or would like assistance exploring the best type of legal structure for your business, our knowledgeable advisors can help. Contact us to learn more. 

work-opportunity-tax-credit-how-can-you-benefit-as-an-employer

Work Opportunity Tax Credit: How Can You Benefit as an Employer?
Work Opportunity Tax Credit: How Can You Benefit as an Employer? 1600 941 smolinlupinco

In today’s tough job market, the Work Opportunity Tax Credit (WOTC) may benefit employers—particularly those who hire workers from targeted groups who often face barriers to employment. 

In September, the IRS issued updated information on the WOTC pre-screening and certification process. To meet the pre-screening requirements for job applicants, both applicants and employers must complete a pre-screening notice (Form 8850, Pre-Screening Notice, and Certification Request for the Work Opportunity Credit) on or before the day a job offer is made. 

Which new hires qualify employers for the WOTC? 

To be eligible for the WOTC, an employer must pay qualified wages to members of targeted groups. 

These groups include:

  • Temporary Assistance for Needy Families (TANF) program recipients
  • Veterans
  • Ex-felons
  • Designated community residents
  • Vocational rehabilitation referrals
  • Summer youth employees
  • Families in the Supplemental Nutritional Assistance Program (SNAP)
  • Supplemental Security Income (SSI) recipients
  • Long-term family assistance recipients
  • Long-term unemployed individuals

Note that the WOTC is generally limited to eligible employees who begin work prior to January 1, 2026. 

Additional WOTC rules and requirements

The WOTC is worth up to $2,400 for each eligible employee, with $4,800, $5,600, and $9,600 for certain veterans and $9,000 for long-term family assistance recipients. 

Additional requirements to qualify for the tax credit include: 

  • Each employee must have completed at least 120 hours of service for the employer
  • Employees must not be related or have previously worked for the same employer
  • Summer youth employees must be paid for services performed in any 90-day period between May 1 and September 15

Work with our tax professionals

There are some cases in which an employer may choose to not claim the WOTC—and some circumstances where the rules may not allow its allocation. Most employers hiring from targeted groups, however, can benefit from the tax credit. 


Contact us to work with an experienced tax advisor and determine the best next steps for your situation.

end-of-year-tax-planning-ideas-for-small-business-owners

End-of-Year Tax Planning Ideas for Small Business Owners
End-of-Year Tax Planning Ideas for Small Business Owners 1600 941 smolinlupinco

As we approach the last few months of the calendar year, it’s time to start thinking about ways to reduce your small business taxes. 

Deferring income and accelerating deductions to minimize taxes—the standard year-end approach—will likely give your business the best results. This also applies to bunching deductible expenses into this year and next to minimize their tax value. 

That said, those expecting to be in a higher tax bracket may get better results with an opposite strategy—for example, pulling income into the current year to be taxed at lower rates, while deferring deductible expenses until next year to offset higher-taxed income. 

Some additional ideas include: 

QBI deduction

Non-corporation taxpayers may be entitled to a qualified business income (QBI) deduction of up to 20%. If taxable income is higher than $340,100 for married couples filing jointly, or half that amount for others, the deduction may be limited (and phased in) based on: 

  • Whether the taxpayer is involved in a service-type business such as law, health, or consulting
  • The amount of W-2 wages paid by the business 
  • The unadjusted basis of qualified property held by the business, such as machinery and equipment

By deferring income, accelerating deductions to keep income under the thresholds, or increasing W-2 wages before the end of the year, taxpayers may be abe to to keep some or all of the QBI deduction. 

Cash vs. accrual accounting

Taxpayers must satisfy a gross receipts test in order to qualify as a small business. For 2022, this means that average annual gross receipts can’t exceed $27 million during a three-year testing period—ot that long ago, that amount was only $5 million. 

Compared to previous years, more small businesses are now able to use the cash accounting method for federal tax purposes, rather than accrual accounting. Cash method taxpayers may find that by holding off billings until next year, paying bills early, or making select prepayments, it is easier to defer income. 

Section 179 deduction

As a small business taxpayer, you may want to consider making expenditures that qualify for the Section 179 expensing option. Expensing is typically available for depreciable property—other than buildings—including equipment, off-the-shelf computer software, interior building improvements, HVAC, and security systems. 

For 2022, the expensing limit is $1.08 million with an investment ceiling of $2.7 million. This means that many small and medium-sized businesses will be able to deduct most or all of their expenditures for machinery and equipment—and that deduction isn’t prorated for the amount of time an asset is in service. If you place eligible property in service by the end of 2022, you can claim a full deduction for the year. 

Bonus depreciation

If qualified improvement property, machinery, and equipment is purchased and placed in service this year, businesses can generally claim a 100% bonus first-year depreciation deduction. 

As with the Section 179 deduction, this full write-off is an option regardless of how long those qualifying assets are in service in 2022. 

Develop a year-end tax plan with us

Tax rules can be complex, so it’s best to consult with a professional before acting. Contact us to work with an experienced tax professional to develop the best tax-saving strategies for your business.

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