June 8, 2022

Plan Now, Save Later: Early Bird’s Guide to 2022 Business Tax Savings

By the end of May, small and mid-sized businesses generally fall into one of two categories. Either you just finished scrambling to finish your 2021 tax returns – or you filed for an extension and are working to meet the fall filing deadline. The last thing on most business owners mind is next year. Which, of course, is exactly what you should be thinking about.

The fact is, effective tax planning is a year-round activity. Developing strategies and taking action now will allow you to take full advantage of deductions and opportunities for savings on your 2022 returns. So where to start? Here are seven areas most businesses should consider:

Business meals
Whether entertaining clients or dining while traveling, business meals are expenses that can really start to add up. Luckily, up to 50% of the cost of business meals may be tax deductible. Not only that, the deduction has increased to 100% for 2022, leading to increased savings for businesses. Both food and beverages may be deducted, but the meal must be business related, and the owner or an employee must be present at the meal. The meal expense must also not be lavish or extravagant – the cost must be reasonable under the circumstances. Remember, the cost of the meal on a receipt needs to be stated separately from any entertainment costs, which are not deductible.

Travel expenses
Meals are not the only travel-related deduction businesses can take. Many work-related travel expenses are deductible, including airfare, hotel, and car rentals. To take these deductions, make sure that travel is longer than an ordinary workday and includes an overnight stay.

Home office expenses
The rise of the COVID-19 pandemic left many business owners and self-employed taxpayers setting up home offices. If you are a sole-proprietorship, shareholder in a s-corporation or a partner in a partnership, you may be able deduct home office expenses. Your home office space – which must be used exclusively as the primary place of business – can lead to several deductions, including a portion of rent or mortgage, as well as repair costs, depreciation of furniture, and a share of utility costs. Business owners can also deduct a share of mortgage interest and real estate taxes. These deductions are based on the square footage of the home office compared to the total square footage of the home.

Bonus depreciation and Section 179 deductions
Thanks in part to the Tax Cuts and Jobs Act of 2017, business owners may deduct 100% of the cost of a wide variety of new and used property employed in their operations – including machinery, equipment, certain software, even building improvements – purchased before January 1, 2023. This will be decreased by 20% per year starting in 2023, so businesses should consider if it makes sense to invest in this sort of property before the year is over.

Another opportunity to consider: Section 179 of the IRS code allows a limited deduction of up to $1,080,000 for the full cost of qualifying assets placed in service during 2022. Many smaller businesses use this option before taking bonus depreciation, in part because it can be applied on an asset-by-asset basis rather than to an entire class of assets. Importantly, the Section 179 deduction is limited to businesses whose asset purchases are less than $2,700,000 for the year.

Business use of car
If an owner uses their car exclusively for business, they can deduct the entire cost of operating the vehicle. If not, they can still deduct vehicle expenses either through the standard mileage rate, or through tracking expenses. Either way, owners need to track their business mileage throughout the year.

Start-up costs
Those who started their own businesses this year can deduct an array of costs, including up to $5,000 for costs related to getting their business running, including advertising and professional fees. They can also deduct $5,000 for costs related to creating the business’s governing provisions.

Tax accounting methods
Changing accounting methods can help businesses reduce taxes by accelerating deductions and/or deferring income. Weiss professionals can help businesses determine if they should change to the one-year deferral method for the recognition of advance payments of goods and services, and whether they should accelerate deductions of qualifying software costs or accrued liabilities. They can also change businesses from overall accrual method to the overall cash method of accounting.

Those are just a few examples of the many places you can save on next year’s taxes by planning ahead. For more ideas tailored to your business, contact your Weiss tax professional.

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