Two major pieces of tax legislation passed in the years 2020 and 2021, during the height of the Covid-19 pandemic – the Coronavirus Aid, Relief, and Economic Security Act (CARES) and its offspring, the Paycheck Protection Program (PPP). Also gaining congressional approval was the Coronavirus Response and Consolidated Appropriations Act. All were intended to provide fast and direct economic assistance to American workers, families, and small businesses.
As the pandemic dragged on, the Consolidated Appropriations Act was approved, continuing many of the features of the earlier programs, and bringing tax implications along with it. Both individuals and businesses need to be aware of these tax-related changes to remain compliant with the law.
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What do small business owners need to know about this year’s new tax regulations? These five points:
- Debt Restructuring. Reassess debt arrangements as inflation and interest rates rise. Keep in mind tax law changes limit your ability to deduct interest.
- Research and Development (R&D) Tax Credit. Effective the first of this year, significant changes were made regarding the ability to expense vs. capitalize costs. Previously, businesses have been allowed to expense R&D while developing a new product, process, or software. These now need to be capitalized.
- Tax Cuts Jobs Act of 2017 has many tax cut provisions. In 2022, deferral provisions within two pieces of the legislation will be coming due.
- Changes to employer-sponsored retirement contributions. Traditional IRA income restrictions and the ability to deduct contributions have been indexed and increased due to inflation.
- Employee Retention Credit. Don’t miss the opportunity to take advantage of this benefit. Originally, if a small business had applied for a PPP loan, it would be ineligible for this aid. This has changed and the assistance is retroactive.
…. And These FAQs
- The employer portion of social security payments were deferred in 2020 as part of the CARES Act. Half is due at the end of ’21; half is due by end of ’22. How will this impact small businesses? Any credits taken on federal tax payments for paychecks dated on or about October 1st must be paid to the IRS based on how often your business is required to pay federal taxes. When paying the deferral in ’21 and balance in ’22, it will be essential to include it on the statement of cash flows that are pending.
- What is the best advice for small firms to stay atop tax laws, maximize deductions, and track income and expenses? Hire a capable CPA firm. If you’re staying with your current accounting system, bookmark articles and web pages/forums that discuss changes to tax laws. Also, set reminders on your calendar to regularly reach out to your accountant or bookkeeper.
- What are the top tips for small business tax deductions in ’22?
- Plan ahead. With the proper receipts and documentation, you can deduct office expenses, cell phone expenses, and personal car mileage.
- Meals and Entertainment (M&E). The days of “passing talk” with an associate or prospect qualifying as a write-off for a steak dinner or ball game are over. The relationship needs to be one that you can “reasonably” expect to do business with. Business meals continue to be 100% deductible through ’22, while entertainment (theatre, country clubs, sporting events) no longer is.
- Home Office. While an employee can’t take a deduction for their workspace, the SBO can if the space is your main place of business and is used exclusively for this purpose. Allowable deductions include repairs and maintenance, utilities, real estate taxes, insurance, and home mortgage interest related to the work area.
- Travel. Since the IRS considers the business day to be eight hours, at least four hours of that day must be spent on a work-related activity. Travel time can be included in this number. Meal deductions while traveling for business depends on distance and if an overnight is required. Save every receipt, logging when, where, and even what you ate.
Final takeaway? Document, document, document, and consult with a trusted accounting professional to be sure you have the information needed to take advantage of all tax benefits that your small business qualifies for.