Year-end business tax strategies for 2022

As the end of the year approaches, tax planning can provide significant tax savings. Tax planning should take into consideration recent tax law proposals and changes.

One strategy is purchasing assets provides the opportunity to expense the asset or a portion of the asset. The amount of the asset to be expensed after the year is over. Buying assets provides flexibility when it’s time to file your tax return.

Another strategy is deferring revenue and prepaying your expenses to reduce your profit.

Deferring revenue and accelerating expenses can be used to reduce taxes for the year. You will need to quit billing customers at the end of the year. Customers can’t pay when they haven’t been billed.

Prepaying expenses will also reduce your taxes. Using the IRS Safe Harbor to prepay your bills allows you to pay your bills a month in advance.

Before using the strategy of deferring revenue and prepaying expenses, you should determine if this strategy makes sense. If you expect to have a larger profit next year, this strategy may not make sense. You will also want to determine whether it’s best to reduce your profit this year and create a different business entity to provide substantial tax savings in both years. I’ve advised many businesses to use the available strategies for the current year and change entities for the following year.

The best business entity may change as a business’s profit changes. When the profit of a sole proprietor begins to exceed $75,000, it may benefit from forming an S corporation to reduce self-employment (SE) taxes. For example, if a sole proprietor has a $150,000 profit, SE tax is paid on the entire profit. By forming an S corporation with a salary of $50,000, the business would avoid paying SE taxes on $100,000. The SE tax rate is approximately 15%, which would provide federal income tax savings of about $15,000 a year.

Another strategy to reduce self-employment taxes is to rent assets from your spouse. Your spouse will have rental income, but rental income isn’t subject to self-employment taxes.

Hiring your spouse can save thousands of dollars without spending a penny. Employee benefits are deductible to your business but are not taxable income to your spouse. Employing your spouse lets you deduct expenditures you are already making, such as medical expenses, life insurance, and tickets to concerts and sporting events.

You should also take into consideration recent federal tax law proposals with the intent to increase corporate and personal income taxes.

The 2023 federal budget proposal proposes increasing corporations’ tax rate to 28% for tax years after December 31, 2022 (up from 21%). With the proposed tax rate changes, maximizing income tax savings is even more important. 

New tax credits should also be considered as part of your tax planning. This includes credits for clean commercial vehicles and credits for improving the efficiency of commercial buildings can provide tax benefits.

Using year-end tax planning strategies can substantially reduce business taxes.

David Zubler has an accounting degree and computer science degree with high distinction and has experience as an accounting manager and controller in manufacturing, and has owned his tax/consulting business since 1990.  David Zubler is the founder and president of Your Tax Care.  The company provides business and tax education to the public at its website, YourTaxCare.com.  David can also be contacted by email at zublerdavid@gmail.com.

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