The past couple of years have been challenging for everyone, but small business owners have felt the impact more than most. To add to the overwhelm, changes to the CARES Act, the Tax Cuts and Jobs Act, and the Inflation Reduction Act may leave you feeling more confused about how to prepare for tax season.
We want to simplify your to-do list and help reduce stress during this already busy holiday season. That’s why we created this end-of-the-year checklist of the top 5 actions to take before going into the new year. As a small business owner, this will help minimize your tax burden so you can start 2023 off in the right direction.
1. Review IRS Elections (Especially if You Had a Net Operating Loss)
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 we see when helping 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.
2. Review Your Deductions
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:
- Advertising
- 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.
3. Review Depreciation
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 lower your business’s taxable income.
4. Check 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 business forms 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 deciding on a retirement plan as each plan type comes with its own unique benefits and drawbacks.
5. Review New 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
As a small business owner, your job is to take care of your employees and customers. At Anderson Financial Strategies, our job is to help you stay focused and organized with your finances so you can do what you do best.
If you are currently working with us and need help tying up loose financial ends before the new year rolls around, we’re here to assist. If you would like to learn how we can help your family or business, please call us at 855-237-4545 to schedule an executive briefing to discuss your goals.
About Shon
Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 15 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Analyst® (CFA®) certification. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as an adjunct professor teaching personal finance courses at Wright State University, leads CFP® exam review courses for Keir Educational Resources, and is president of the CFA Society Dayton. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dog, Jack. Over the years, Shon has been involved in several volunteer organizations including the Wright State chapter of Delta Tau Delta as an alumni advisor and was a Big Brother in the Big Brothers/Big Sisters program. To learn more about Shon, connect with him on LinkedIn.