Year-End Tax Planning Ideas for Your Small Business

• Learn about the QBI deduction.
• Find out how cash vs accrual accounting can help your small business.
• Discover information about the Section 179 deduction.
• Learn how to take advantage of bonus depreciation.

Now that Labor Day has passed, it’s a good time to think about making moves that may help lower your small business taxes for this year and next. The standard year-end tax-planning approach of deferring income and accelerating deductions to minimize taxes will likely produce the best results for most businesses. Also, consider bunching deductible expenses into this year or next to maximize their tax value.

If you expect to be in a higher tax bracket next year, opposite strategies may produce better results. For example, you could pull income into 2022 to have it taxed at lower rates. Then, defer deductible expenses until 2023, when you can claim them to offset higher-taxed income.

Below, Fiducial offers other tax-planning ideas that may help you save tax dollars if you act before year-end.

Tips for year-end tax planning

QBI deduction

Taxpayers other than regular ("C") corporations may qualify for a deduction of up to 20% of their qualified business income (QBI). For 2022, if taxable income exceeds $340,100 for married couples filing jointly (half that amount for others), the deduction may be limited based on: whether the taxpayer is engaged in a service-type business (such as law, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all of the QBI deduction by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout). You also may be able to increase the deduction by increasing W-2 wages before year-end. The rules are complex, so consult your Fiducial representative before acting.

Cash vs. accrual accounting

More small businesses can use the cash (rather than the accrual) method of accounting for federal tax purposes than could to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2022, if, during a three-year testing period, average annual gross receipts don’t exceed $27 million, you will satisfy the test. Not that long ago, it was only $5 million. Cash method taxpayers may find it easier to defer income by holding off billings until next year. They may also pay bills early or make certain prepayments.

Section 179 deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2022, the expensing limit is $1.08 million, and the investment ceiling limit is $2.7 million. Expensing is generally available for most depreciable property (other than most buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC, and security systems.

The high dollar ceilings mean that many small- and medium-sized businesses will be able to currently deduct most or all of their outlays for machinery and equipment. Even better, the deduction isn’t prorated for the time an asset is in service during the year. Just place the eligible property in service by the last days of 2022. Then you can claim a full deduction for the year.

Bonus depreciation

Businesses also can generally claim a 100% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used if purchased and placed in service this year. Again, the full write-off is available even if qualifying assets are in service for only a few days in 2022.

Consult with Fiducial and make a year-end plan

These are just some year-end tax-planning strategies that may help you save taxes. Want Fiducial to tailor a plan that works for you? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, and paid sick and family leave.