Midyear Tax Update 2022
This update contains some of the new tax rules for this year, some tax planning ideas to possibly reduce your taxes, and reminders to address other tax rules that may require special attention for the preparation of your tax return next year.
New business tax rules this year include:
An increase in the standard business mileage rate to 62.5 cents per mile beginning July 1, 2022, up from 58.5 cents for the first 6 months of this year.
North Carolina Pass-through Entity Tax (PET) election can reduce taxes for owners of eligible pass-through businesses (S corporations, as well as certain partnerships and LLCs filing as partnerships). To be eligible, partnerships and LLCs must generally have only individuals, estates, and/or certain trusts as owners.
The election is made on a 2022 tax return timely filed in 2023. This new election allows an eligible pass-through business to pay the NC income tax on its income, rather than each owner paying the NC income tax on his/her share of the income. As a result, the business may deduct the NC tax on its federal income tax return. This election allows owners to avoid the $10,000 limit on state and local tax deductions on the owners’ individual federal tax returns. The deductible NC income tax payment would generally be 4.99% (new NC individual tax rate) of company taxable income.
There are still many unanswered questions about the application of the new election. For example, we know it applies to business income and think it applies to rental income, but it is not clear yet if it applies to investment income such as dividends and capital gains. Another possible issue is whether payments made in 2022 can be deducted in 2022 if the election cannot be made until 2023. If elected and all taxes are paid with or before the 2022 pass-through return is timely filed, there would be no penalty for not paying estimated taxes on the pass-through income during the year.
A 100% deduction for business meals from restaurants (dine-in, take-out and delivery) and business meal per-diems. This rule also applied in 2021. A business should use three separate expense accounts for: 1) restaurant meals, 2) non-restaurant meals which are 50% deductible (grocery store, convenient store, Costco, etc.) and 3) entertainment (not deductible).
Beginning in 2022, research and experimental (R&E) costs must be capitalized and amortized over five years instead of currently deducting the expenses. This change could significantly increase business taxable income and taxes. The new rule applies to R&E expenses eligible for the R&E tax credit plus any other R&E expenses. One such cost is for software development designed to be used internally. All R&E costs should be posted to R&E accounts so they can be identified when preparing your tax return. Note there are bills in Congress to delay or repeal this provision.
Some opportunities for tax planning or areas to address for tax compliance include:
When the stock market drops there are opportunities to save taxes. First, a stock, mutual fund or ETF that is worth less than what you paid for it can be sold for a loss to reduce your taxes and then repurchased after more than 30 days. If bought within 30 days of a loss on a sale, the loss cannot be deducted. This is a “wash sale” and the nondeductible loss adds to the cost of the new stock. Be sure to specify which lot of shares you are selling if you have more than one lot. Second, you can sell for a loss then not reinvest. This strategy is often used at year-end to take losses to offset gains realized or distributed from mutual funds during the year. Third, a market downturn is a good time to consider a Roth IRA conversion since the amount of taxable income resulting from the conversion would be lower.
Track and record all transactions in virtual currency if held outside a brokerage account or if the account does not track or record such transactions. Most virtual currency transactions are taxable including when received for services performed. Also taxable is the gain or loss realized when virtual currency is used to pay for goods or services. The same applies to nonfungible tokens (NFTs).
There is still time to claim the Employee Retention Tax Credit (ERTC) for 2020 and/or 2021 if your business qualifies. The 2020 credit is up to $5,000 per employee, and the 2021 credit can be worth up to $21,000 per employee. Please see these summaries for 2020 and 2021 for more details to see if your business might qualify. Please let us know if we can help you determine if you qualify and how to go about claiming the credit. Recovery Startup Businesses are still eligible for ERTC through the end of 2021. A Recovery Startup Business is one that started after Feb. 15, 2020 and, in general, had an average of $1 million or less in gross receipts. They could be eligible to take a credit of up to $50,000 for the third and fourth quarters of 2021.
A Work Opportunity Tax Credit of up to $9,600 is available for hiring certain qualified veterans. A tax form must be submitted when the veteran is hired. More information about the Work Opportunity Tax Credit is available here: Work Opportunity Tax Credit
Hiring a remote workforce can have tax implications, especially when employees are in other states. In addition to state payroll taxes, adding an employee who resides in another state can often make a business subject to state sales tax and/or income tax requirements. Please let us know if we can help you determine the state tax implications of hiring out-of-state workers.
Determine if a change in making charitable contributions to every other year would save taxes (and be acceptable to you). If your itemized deductions (medical expenses, personal state income and property taxes, mortgage interest and charitable contributions) are roughly the same amount as the standard deduction allowed for your filing status ($25,900 for married and $12,950 for single), making your donations every other year (“bunching”) would likely reduce your taxes. You would claim larger itemized deductions every other year and the standard deduction in the other years.
Get a proper written acknowledgement for charitable contributions over $250. The receipt should be from the organization and include the name of the organization, the amount of any cash contribution, the description but not the value of any non-cash donation, the date or year of the contribution and either a statement that no goods or services were provided by the organization in exchange for the contribution or the description and value of any such goods or services provided or that only intangible religious benefits were provided. The IRS and courts often deny a tax deduction for a contribution that lacks a proper receipt as of the time of filing the tax return.
If you have a foreign bank account or a “specified foreign financial asset,” be sure to report it on FinCen Form 114 or Form 8938 if required. We are seeing substantial penalties being levied for non-reporting of foreign bank accounts even when no taxes are owed on the foreign account. In the latest case, a penalty of nearly $1.8 million was upheld by an appellate court.