The final weeks of the year seem to materialize out of nowhere. For small business owners, it’s important to pause and review tax changes and other important financials prior to ringing in the new year. Here are five important items to check off your list before year end.
1. IRS Elections Related to NOLs
If you had a net operating loss (NOL) this year, double-check your IRS elections to ensure you made the correct ones. This is one of the biggest issues our CPAs see when they help small business owners file their taxes.
All these decisions play a role in how much money your business may owe in taxes. Talk with a CPA or financial professional about which elections may be right for you.
Additionally, how you structure your small business can make all the difference in the world when it comes to taxes. A tax professional can help you decide which entity type is the best for your business and help you apply before the deadline hits.
For example, let’s say you found out you could save more in taxes by structuring your business as an S corporation instead of an LLC. If you’re a new business, you have two months and 15 days from the day you file your articles of formation to file your S corp elections. So, if you filed your articles of formation on March 1, you have until May 16 to file your S corp election for it to take effect that same tax year.
The CARES Act brought about major tax incentives to people who donate to charity in 2020 and 2021, but the provisions of this Act have not been extended to 2022. This means you can no longer write off up to $300 in cash donations from your tax return if you take the standard deduction. And itemized charitable deductions are once again capped at 60% of your adjusted gross income for cash donations made. If you were planning to take charitable deductions in 2022, be sure to review them carefully to make sure they meet new requirements.
There are still deductions available for basic business expenses and these can help reduce your taxable income significantly. Some common examples of business expenses include:
- Legal and professional fees
- Office expenses, including costs related to the business use of your home
- Business use of your vehicle
- Continuing professional education
- Memberships to professional organizations
Tax-deductible business expenses need to be ordinary and necessary to operate your business. Consult your tax professional for more details on qualified business expenses.
New depreciation rules have come into effect in recent years due to the Tax Cuts and Jobs Act (TCJA). These changes allow you to write off most depreciable assets “in the year they’re placed into service,” according to the IRS.
Common items you can write off for depreciation include computers, equipment, machinery, cell phones, buildings, office furniture, and vehicles, as well as intangible items like copyrights.
Make sure you keep a list of everything that counts as a depreciable expense. Doing so will help you lower your business’s taxable income.
4. Eligibility for Company Retirement Plans
There are several different tax-advantaged retirement plans available to small business owners, including the solo 401(k), the SEP IRA, and the SIMPLE IRA. A solo 401(k) is designed for businesses with only one employee (the business owner), whereas SEPs and SIMPLEs can be used for businesses with more employees, though SIMPLE IRAs are capped at 100 employees.
According to the IRS, an employee can participate in a SEP IRA if they:
- Are at least 21
- Have worked for the employer in at least 3 of the last 5 years
- Received at least $650 in 2022
Business owners can choose to be less restrictive than this and allow other employees to participate in a SEP, but you can’t be more restrictive than these IRS rules allow.
Review your SEP IRA eligibility requirements to ensure employees can participate in the program if you want them to.
Choosing to add an employer-sponsored retirement plan to your company can be a great way to take advantage of tax credits, including those for setting up a new plan and auto-enrolling employees. You may also be eligible for additional tax deductions by making qualified employer contributions on behalf of your employees. It’s important to review your options with a qualified financial professional before making a decision on a retirement plan as each plan type comes with its own unique benefits and drawbacks.
5. Due Dates & Filing Methods for 1099s
Starting in 2020, any freelancers or contract workers who earned more than $600 from your company will receive Form 1099-NEC instead of 1099-MISC. NEC stands for “non-employment compensation”—and it’s only used for reporting independent contractor income.
1099-NEC forms are due on January 31. If this day falls on a weekend, they’re due the following business day.
How We Help
At Heimensen Wealth Advisors, we specialize in helping small business owners accumulate, preserve, and enjoy their wealth for years to come. If you need help tying up loose financial ends before the new year rolls around, we’re happy to assist you. To get started, schedule an introductory meeting, call 712-472-3867 or email firstname.lastname@example.org. Be sure to check out Corey’s book, Stop Doing Dumb Things With Your Money, and tune into his new Podcast, WIN—What’s Important Now.
Corey Heimensen is owner and Accredited Investment Fiduciary® at Heimensen Wealth Advisors, a full-service financial planning and investment management firm serving pre-retirees, independent contractors, small business owners, and young families. With 30 years of experience, Corey believes that future success in life means that you have to conquer today, and he equips his clients to do just that through education, guidance, and customized strategies. Corey’s goal is to do his part to make his clients’ lives better, taking some of the financial burden off their shoulders so they can focus on what matters most to them.
Corey is the author of Stop Doing Dumb Things With Your Money, and host of his new podcast, WIN—What’s Important Now, where he discusses planning strategies you can utilize now to help you build a financial path for tomorrow. Corey earned a degree in finance from Buena Vista University and resides in Rock Rapids, Iowa, with his wife and three children. When he’s not building his firm and working with clients, you can find Corey boating, reading, and attending sporting events. He loves anything related to basketball! To learn more about Corey, connect with him on LinkedIn and subscribe to his podcast.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.