With the passthrough entity tax deadline behind us, it is now time to focus on tax planning and tax savings for 2022. Although it is early in the year and future tax legislation is still uncertain, businesses should begin to prioritize their tax plan. Below is a list of tax planning techniques businesses can consider discussing with their tax advisors to mitigate taxes during 2022.
Entity Structure:
Choosing an entity structure is extremely important. Analysis should be done to see whether it would make more sense to structure your company as a corporation to take advantage of the 21% tax rate or as a passthrough entity and benefit from the Qualified Business Income Deduction (QBID) of up to 20% of business income.
Passthrough Entity Tax (PTET) Election:
Many states created a passthrough entity tax as a workaround for the $10,000 cap for state and local tax deductions. Each state has its own rules for the PTET, but the purpose is to pay a tax at the passthrough entity level and receive a deduction for federal purposes without being subject to the $10,000 SALT cap. The tax paid would be a credit for state purposes where each state has specific rules. Analysis should be done to see whether it would be advantageous to take part in this election.
Bonus Depreciation
Consider taking advantage of 100% bonus deprecation. Currently in 2022, a business can immediately deduct 100% of the purchase price of eligible assets instead of depreciating over the life of the asset. This allows businesses to create large deductions in the year of purchase and possibly create a net loss for the year. Bonus depreciation is set to reduce to 80% on January 1, 2023.
100% Meals Deduction
As part of the Consolidated Appropriations Act, food and beverages are 100% deductible if purchased from a restaurant. This rule is set to expire in 2023. Businesses should be sure to review the classification of their meal expenses to benefit from the 100% deduction in 2022.
Retirement Plans
One of the best ways for business owners to reduce taxes is to create and fund a retirement plan. Business owners have several choices for retirement plans. Depending on the contributions and complexity, businesses can create a SEP IRA, Solo 401k, Defined Benefit Plan and more. Business owners can use their hard-earned money to fund their retirement account while reducing their overall tax burden.
A customized tax plan is critically important for every business. Strategic tax planning provides business owners and operators an element of control and the opportunity to mitigate taxes, improve cashflow and potentially increase enterprise value.
All the above strategies could result in significant tax saving and should be included in a formalized tax plan for your business. Please feel free to reach out to your advisor and LTax so we may assist you in developing a customized tax plan for your business.
