Midyear Tax Checkup (and Write-Offs We Hope You’re Tracking)
Now is a perfect time—before the year-end holiday rush—to meet with your tax advisor and ensure you’re taking the best steps to lower your tax bill for the year. Here’s a look at some strategies to consider.
With half the year over, you have a good idea of how your business is doing and can make some projections for the balance of the year. Now is a great time to do midyear tax planning so you can take actions to lower your tax bill without the year-end rush. Tax law changes over the past several years and what’s on the horizon suggest certain strategies.
Actions you took in the past may trigger taking additional actions now. For example, if in 2020, due to Covid-19, you took a distribution from your qualified retirement plan or IRA, you’re allowed three years in which to put some or all of the funds back in so you can continue to save for retirement. Recontributing withdrawals doesn’t affect limits on contributions for 2022. But it can put money back in your pocket by allowing you to file an amended return to recoup the taxes paid on the 2020 distribution. If you treated the entire distribution as income in 2020, then file Form 1040-X for 2020. If you relied on a three-year rule to spread the distribution over this period, then submit an amended return for 2020 and 2021. File your amended returns electronically to expedite your tax refund.
If you were self-employed in 2020 and opted to defer part of your self-employment tax, you paid one half of the deferred amount by the end of 2021. Be ready to pay the other half by the end of 2022 (technically, the IRS gives you until January 3, 2023, to do this).
Use Tax Breaks Now
There are many deductions you can take advantage of—as long as you keep track of things. For example, if you are self-employed and drive your vehicle—a car, truck or van—for business, you can deduct your costs, provided you have records to show this. This means keeping receipts of gas and other costs, or relying on an IRS standard mileage rate, which was 58.5 cents per mile for the first half of 2022 and 62.5 cents per mile for the second half of 2022. Relying on the IRS rate saves you from retaining receipts, but you’re still required to have a record of business driving, which can be a written log or an app. Recordkeeping requirements for business driving are detailed in IRS Publication 463.
Review what your business needs between now and the end of the year. This may include additional training, marketing, office supplies, makeup and costumes, charitable giving and travel for performances. Other tax breaks to consider now:
Credits for setting up a qualified retirement plan. If your business doesn’t have one and you set up a plan that includes at least one employee who isn’t an owner, you can take credit for setting up a qualified retirement plan. The credit runs for three years. And there’s a second credit if you adopt an automatic enrollment 401(k) plan for your business. Self-employed solopreneurs don’t get these credits but still benefit from deducting contributions to plans they set up for themselves. Check your plan options and contribution limits for 2022.
Work opportunity tax credit. If you’re hiring for your store or studio, you may be eligible for the work opportunity tax credit (check eligibility here). Be sure you have your new employee complete Form 8850 and submit it to your state workforce agency within 28 days of the start of work, or you’ll lose out on an otherwise available tax break.
If your dance studio or store needs any renovations, begin your planning now. There’s a 100 percent deduction for “qualified improvement property” in 2022. A qualified improvement isn’t simply a coat of paint or new window treatments; it’s changes to the interior of the building without altering the internal structural framework. Examples of qualified improvements include replacement of drywall and ceilings, new interior doors, upgrades to electrical and plumbing and fire or security protection.
To claim the deduction, the improvement must be paid for and placed in service (i.e., ready for use in your business) by the end of the year. Due to supply chain issues and labor shortages, the sooner you begin, the more certain you can be that you’ll nail down the deduction.
Even if you have to finance your improvement, it may be wise to act this year. The deduction is scheduled to decline to 80 percent next year, and another 20 percent each additional year until it’s zero in 2027. And the interest you pay on a loan or line of credit is deductible (there are limits on deducting interest expense only for businesses that aren’t “small” because their average annual gross receipts in the three prior years meet a dollar amount—$27 million in 2022).
Perhaps you need new equipment, such as a new sound system or barre for your studio or a tablet for your business. Through special 2022 tax rules, the cost can be fully deducted this year instead of depreciating the cost over several years. For example, the Section 179 deduction allows profitable businesses to deduct up to $1,080,000 in 2022. Or, instead of adding items to your balance sheet, you can treat them as materials and supplies deductible up to $2,500 per item or invoice.
Adjust Your Estimated Taxes
If you pay estimated taxes, you have two more opportunities for 2022 to get it right. If your original estimates were higher than your income proved to be for the first half of the year, consider reducing your last two installments, which, for individuals, are due September 15, 2022, and January 17, 2023. This will help conserve cash flow; it won’t change your final tax bill.
If your income in the first half of 2022 is higher than you projected when you first set your estimated tax payments for the year, consider increasing your last two payments. Before you do, check to see if underpayments will be exempt from penalty (explained in IRS Publication 505), suggesting you might wait to pay up when you file your return. But be sure to stash the cash needed for this purpose.
The Bottom Line
One of the best actions you can take now is to meet with your CPA or other tax advisor. Together you can assess your tax picture and select strategies best suited to your situation. And keep in mind the possibility that Congress may enact tax legislation before the end of the year that could alter the best of plans. You never know.
Barbara Weltman, an attorney and small-business expert, is the author of J.K. Lasser’s Small Business Taxes 2022: Your Complete Guide to a Better Bottom Line, and publisher of “Idea of the Day” at bigideasforsmallbusiness.com.