There is no question that tax season can create a great deal of stress for many business owners. However, it does not have to—as long as you understand how to conduct year-end planning to minimize your tax liability and grasp the best ways to take advantage of new tax incentives. Below, we outline some advice to keep in mind:
Tax status changes may be helpful: When you first develop your small business, you must structure your business by choosing to operate as a sole proprietor, partnership, limited liability company (LLC), S Corp, or C Corp. But sticking with this choice—once your business grows—is not always a good idea because this structure greatly affects your tax situation.
For example, sole proprietorships, partnerships, LLCs, and S Corps do not pay a corporate income tax. Rather, the organization’s net income “passes through” to the business owner’s individual tax return—and a tax bracket of 37 percent. As a result, this tax status change can result in large tax savings—especially for LLC members in the top tax brackets.
It is important to note that while the top corporate tax rate used to be 35 percent, the Tax Cuts and Jobs Act of 2017 (TCJA) [See sidebar] reduced the top corporate tax rate from 35 percent to 21 percent. However, this 21 percent corporate tax rate may not last—as the House Ways and Means Committee could decide to increase the corporate tax rate to 26.5 percent.
SIDEBAR: What is the Tax Cuts and Jobs Act (TCJA)?
Passed in December of 2017, the Tax Cuts and Jobs Act made several significant changes to the individual income tax. These changes include a nearly doubled standard deduction, new limitations on itemized deductions, reduced income tax rates, and reforms to several other provisions. In all, these changes simplify the individual income tax by eliminating the need for millions of households to itemize their deductions.
Tax reform can be beneficial: In addition to dropping the top corporate income tax rate, the TCJA also developed the qualified business income (QBI) deduction –which allows pass-through business owners a deduction up to 20 percent of their share of the business’ income.
Please note that owners of specified service trades or businesses (SSTBs) cannot use this deduction if their income is too high. SSTBs are typically defined as service-based businesses, where the business depends on the reputation and skill of employees and owners. Some examples of SSTBs include medical practices, consulting firms, law firms, professional athletes, artists and musicians, financial advisors, and investment firms. Engineering and architectural firms are not included.
If you are considered a SSTB, your QBI deduction begins to phase out when your total taxable income exceeds a specific amount. If your business is not an SSTB, you can claim the deduction—but it does have limitations. Because this deduction can be quite confusing, discussing the pros and cons with your accountant or tax professional can be extremely helpful.
Consider COVID-19 tax relief: In the last two years since the pandemic hit this country, Congress has passed numerous pieces of legislation to help small businesses survive COVID-19. Some of this legislation includes the Coronavirus Aid, Relief, and Economic Security Act (CARES) and the Coronavirus Response and Relief Supplemental Appropriations ACT (CRRSAA). These laws provide assistance to small business owners in the form of employee retention credit, sick and family leave credit, and paid leave credit for vaccines.
Employee Retention Credit (ERC): To help offset the cost of employee salaries and health plans, this ERC provides a refundable credit of up to $5,000 for each full-time equivalent employee an organization retained from March 13, 2020, to Dec. 31, 2020, and up to $14,000 for each retained employee from Jan. 1, 2021, to June 30, 2021.
Sick and family leave credits: The Families First Coronavirus Response Act (FFCRA) provides small and midsize employers refundable tax credits that reimburse them for the cost of providing paid sick and family leave wages to employees for leave related to COVID-19 through September of 2021.
The FFCRA gives businesses with fewer than 500 employees money to provide employees with paid sick, family, and medical leave for reasons related to COVID-19—either for the employee’s own health needs or to care for family members. Workers are able to receive up to 80 hours of paid sick leave for their own health needs or to care for others—and up to 10 more weeks of paid family leave to care for a child whose school or place of care is closed, or child care provider is closed or unavailable due to COVID-19 precautions.
Paid leave credit for vaccines: The American Rescue Plan Act of 2021 (ARP) allows small and midsize employers, as well as some governmental employers, to claim refundable tax credits that reimburse them for the cost of providing paid sick/ family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations. Self-employed individuals are eligible for similar tax credits.These ARP tax credits are available to eligible employers that pay sick and family leave for leave from April 1, 2021, through Sept. 30, 2021.
Tax filing deadlines in 2022: This year, tax day falls on Monday, April 18. In addition to this date, small business owners need to be aware of the following 2022 tax deadlines:
April 18: The due date to file 2021 tax return or request extension and pay tax owed due to Emancipation Day holiday in Washington, D.C., even for those who live outside the area.
April 19: The due date to file 2021 tax return or request extension and pay tax owed for those who live in Massachusetts or Maine—due to Patriots’ Day holiday.
Sept. 15, 2022: Third-quarter 2022 estimated tax payments due, and extended partnership and S corporation tax returns due.
October 17: Due date to file for those requesting an extension on their 2021 tax returns.
As you approach the 2022 tax deadline, it is essential to be prepared for and knowledgeable about ways to reduce your small business tax payments. Because every business is unique, remember the importance of discussing your business needs with a tax professional. There is no question that making unnecessary tax mistakes is something you want to avoid.
Whether you are a new or established business owner, NCH knows how important it is to minimize your tax liability. Our tax experts will work with you to ensure you take advantage of all applicable tax incentives. Call us at 1-800-508-1729 to learn more!