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Small Business Taxes: What to Expect in 2022

Small Business Taxes What to Expect in 2022

Tax obligations can be complicated and subject to change frequently. If you are a small-business owner, here’s what you can expect in 2022.

  • Tax obligations can be complicated and frequently change, so it is important to make time to review the most recent tax laws and codes.
  • Many changes were made for small businesses by major tax legislation in 2018 and the COVID-19 legislation. Some of these are still in force while others are ending.
  • To ensure compliance with all regulations and to pay the correct amount, you should consult a CPA.
  • This article was written for small business owners that want to learn about their tax obligations for the year.– It’s crucial to keep up-to-date on tax laws as a small business owner so that you pay the correct amount each year. For the 2021 tax year, there are many changes to the federal tax code which will affect small businesses. This guide will help you learn the most important information about taxes for this year. Do you want to file your taxes yourself? Check out our reviews of the top tax software for small business. ]

Tax changes for 2022

These changes will be in effect until 2022. Make sure you are aware of their implications for your small business before filing.

Social Security deferred taxes

The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act allows employers to delay deposits of the portion of Social Security taxes due between March 27, 2020 and December 31, 2020. In 2021, the half of these deferred taxes would have to be paid by Dec. 31, 2021. The remainder will be due Dec. 31, 20,22. The IRS will declare all deferred taxes invalid if you don’t pay the first 50% on time and assess penalties for all deferred taxes that were not paid by the due date.

Retention tax credit for employees

The Infrastructure Investment and Jobs Act has cancelled the 2021 fourth quarter employee retention credit. You will be barred from claiming this credit for the fourth quarter. You may be penalized for having claimed the credit (the bill was passed on Nov. 15, 2021).

Operating rules for the net

Your business can only carry forward 80% of its taxable income if it had a net operating profit in 2018 or 2020. If a business has taxable income of $50,000 and loses $55,000 in 2020, then the maximum amount that can be carried forward is $50,000 multiplied by 80%. This would make the carryover $40,000 instead of the full $55,000. This could result in a cash payment requirement and could also impact state income tax calculations.

Limitations on business-loss excess

Businesses could either have net operating losses for five years back or carry them forward by temporarily suspending the Tax Cuts and Jobs Act rules in 2019 and 2020. These rules will be in effect for the 2021 tax year. This means that taxpayers can’t deduct losses exceeding $524,000 for married couples filing jointly, or $262,000 for single taxpayers. This applies to all business income, losses, and Schedule C income.

Additionally, W-2 wages cannot be used to offset business losses. Spousal income, which is not subject to the same tax as business losses, may be subject to tax.

Interest expense limitation rule

Another tax rule, the interest expense limitation rule, was temporarily suspended in order to assist Americans during the pandemic. However, it will be back in force for 2021 tax year. This rule reduces taxable income from the current tax year, and lowers the interest expense deduction to 50% to 30% of adjusted income.

Charitable donations

The charitable donation rule, unlike other changes, is a positive change for taxpayers in the 2021 tax year. A C corporation can deduct donations up to 25% rather than the previous 10% of its taxable income (to do so, the business must elect the Increased Corporate Limit on a contribution-by-contribution basis).

Businesses that donate food inventory may be eligible for 25% or more deductions. This applies to C corporation’s taxable income. It is based on the aggregate net income of all trades or businesses that contribute to S corporations, sole proprietorships, and partnerships.

Families First Coronavirus Response Act

Certain businesses were required to offer paid sick leave to COVID-19-affected employees. This was under the Families First Coronavirus Respond Act (FFCRA). These payments were eligible for tax credits of 100% of sick-leave, family-leave, and qualified healthcare plan expenses. The employer’s share of FICA pay taxes is also available for sick-leave costs incurred under the FFCRA. This tax credit is available for the first quarter 2021 if you are eligible.

Types of taxes for small businesses

The structure of a business can affect the tax rates for small businesses. Here are five basic taxes that apply to small businesses.

  • Income taxAll businesses, except for partnerships, file an annual income tax return. However, information returns are filed by partnerships.
  • Self-employment tax This tax is based on your net earnings and goes towards your Social Security or Medicare obligations.
  • Employment taxes If you have employees, there are taxes (and forms), related to their Social Security, Medicare, federal income taxes withholdings and federal unemployment taxes. This category includes payroll taxes.
  • Excise Tax:There is a variety of taxes that fall under the category of excise taxes. If you sell or make certain products, operate a specific business type, use certain equipment, facilities or products, or receive payment for qualifying services this will affect your business. It applies to many types of services, so it may sound vague. Fuel, tobacco, and alcohol are the most common products subject to an excise tax.
  • Estimated taxes Many business owners (sole proprietors and partnerships, as well as shareholders of S corporations) are required to pay quarterly estimated tax payments. If you do not have enough taxes withheld each paycheck, or if your paycheck isn’t sufficient, this requirement will apply to you.

Important things to keep in mind

You may not know all the details of filing a tax return for a business that was established in 2021. These are key points to keep in mind.

  • Your tax ID number is required to file your tax returns. This number is usually either your employer identification number or the Social Security number. However, in rare instances other numbers may be available.
  • You will be responsible for 15.3% self-employment taxes on your net self employment income. This is the amount that an employer would typically deduct from your pay for Medicare and Social Security taxes.
  • All income, cash and other, must be reported on your tax return.
  • In some cases, you can deduct your premiums for health insurance as a business expense if you are paying them yourself.
  • You can request an extension if you aren’t ready to submit taxes by April 15th. If you do not want to be charged interest and penalties, you must pay the estimated taxes. For S corporations, March 15 is the deadline to request extensions. C corporations have until April 15 for extensions.
  • Bonuses for employees are treated differently to regular wages. There is a 22% bonus tax and a separate rate for Medicare and Social Security taxes.
  • The IRS considers your self-employment income if you have a regular job with a side hustle. You are then taxed accordingly.

Tax changes in the past

You should also keep in mind some minor changes made by the 2018 tax reform law. It’s important that you understand all regulations as they were implemented. This is something you should discuss with your accountant. Notable changes include deductions to pass-throughs, first year bonus depreciation, and net operating loss changes.

International business

Anthony Parent, a founding partner at Parent & Parent LLP, stated that small businesses could be in for a shock if they have significant overseas operations. There are many small and medium-sized businesses with an international component. We are trying to be ahead of the curve and warn people.

International taxation regulations and taxation are complex. It is important to consult a professional to make sure you are being taxed correctly.

Cap on state and local taxes (SALT).

Tax filers cannot deduct more than $10,000 in state, local and income taxes starting 2020. SALT deductions are available to many business owners who have a pass-through entity located in high-tax states. Wayne Winegarden is a senior fellow at Pacific Research Institute and said that business owners need to be aware of the cap. He stated that he believes the SALT cap will be significant in high-tax states. This is because small businesses will be filing their personal taxes.

Pass-throughs and corporations are subject to deduction

The tax reform legislation allowed for significant deductions for corporate and pass-through entities. Pass-through businesses can be small businesses that are structured as S corporations or limited liability companies. About 95% of U.S. companies are pass-throughs. These businesses can now claim a 20% deduction under the law. Only owners of service-based businesses like law and accounting firms who earn more than $315,000 (if they are married filing jointly) and $157,500 (if they are single filers) each year have this limitation.

C corporations also received a significant deduction. The law reduced the tax rate from 35% down to 21%. This reduced rate is intended to encourage major corporations to return to the U.S. to create jobs and wealth.

First-year bonus depreciation

The 100% bonus depreciation deduction for the first year was increased to 100%. Businesses that purchased eligible equipment or property could now deduct the entire purchase price, instead of having to write off a portion each year. Businesses were able to save more upfront money that could be used to invest in the business or hire employees.

Westwood Tax & Consulting founder Josh Zimmelman said that this allows businesses to quickly write off the cost for assets. A company can purchase vehicles, computers and equipment and claim all of it on their tax return.

Winegarden stated that the tax break was an incentive to businesses to spend more. He stated that anything that brings you closer to full expensing will increase the value and burden of taxation, reward capital-intensive companies, and reward them for their investment.

Important 2022 deadlines

The following tax deadlines are in effect for 2022

  • For sole proprietorships, household employees, and corporations, 2021 tax returns are due by midnight April 18, 2022. Taxes for partnerships and S corporations are due March 15, 2022.
  • For estimated income tax, the quarterly tax deadlines in 2022 are April 18, June 15, Sept. 15, and Jan. 15, 2023 for Q1.

Common tax issues for small businesses

  • You should make quarterly tax payments to IRS if you have a tax obligation of less than $1,000. You could be subject to penalties and interest if you don’t.
  • You could be subject to an IRS audit if you claim too many deductions in your business tax returns.
  • The IRS will flag you for estimating income and deduction amounts rather than using actual numbers. Audits can be initiated if numbers appear too rounded, such as $5,128, instead of $5,000.
  • Not only can it cause more stress but you may also miss out on deductions if you leave all the calculations and filing for after taxes are due. The best accounting program helps you keep track of your income and expenses all year.
  • If you work at home, you could end up paying more than you need. You can do this by multiplying your actual home maintenance expenses by the amount of your home that is used for business purposes and taking the square footage of the home office ($5/square foot).
  • The IRS may disallow deductions if you continue to report losses year after year.
  • Education and training expenses (related only to the business); depreciation of furniture, equipment, and other assets; mileage, for work, if you drive (not including commuting); and tax payments related to business such as payroll tax and state income taxes. You should ensure you review all the deductions available and only claim those that you are eligible to.
  • Do not take tax deductions to cover illegal activities. Instead, claim crazy tax deductions to help relieve stress from work and every meal at a restaurant, personal or business.

Tax tips for small businesses

There are some things you should keep in mind if you are buying a business or new to tax structures for small businesses. These are five tips to help you get started.

  • All year, think about taxes. Income taxes should not be viewed as an annual event for small business owners. Tax planning should not be an annual event. Tax preparation can become more difficult and costly if you wait until the last minute.
  • Keep up to date with tax law changes. This will ensure that your tax professional does a good job and keep you informed as a business owner.
  • Do not make assumptions. Never assume that particular tax breaks or policies will pass.
  • Select the best state to incorporate. Your business does not have to be in the same state as your company. These states are the best for small business taxes if you are just starting out.
  • A tax refund is not something you want. A refund is usually a result of overestimating the tax you have paid. This could be reinvested in your business.

Tax deductions for small businesses that are top-of-the-line

Although this is not a complete list of tax deductions for small businesses (and your business must be eligible), it is a good starting point to work with a CPA to make sure you get all the relevant deductions.

  • Rent: If your retail space or office space is rented, your rent will be fully deductible.
  • Home office You can deduct expenses related the to a portion of your home that you own (must be used regularly for business purposes). You can take $5 per square feet up to 300 sq.ft, or you can use a percentage of your total home square footage to deduct the costs.
  • Advertising Promoting your business not only helps you grow your company but also reduces your tax liability as all expenses are fully deductible. This includes business cards, flyers and digital marketing.
  • Vehicle As long as you are able to document and prove that the vehicle was used for business purposes you can deduct operating costs. You can either use the 56 cents per mile deduction for 2021 like the home office deduction or itemize the costs.
  • Utility: Basics of running your business are also fully deductible. The costs of utilities such as electricity, water and heat can be deducted.
  • Business travel costs are fully deductible. These costs include airfares, hotels, and any other transportation expenses you incur on a business trip.
  • Employee salaries It pays to pay your employees. The tax deductions for their salaries, as well as many other benefits like retirement and education opportunities, are significant. Learn how to create great employee benefits plans. ]

Resources for small business tax

These are additional resources to learn more about taxes

  • The Small Business Administration (SBA), provides a guide for business owners on how to navigate the tax code and keep up-to-date on their tax obligations.
  • Information on how the Affordable Care Act affects taxes for small businesses can be found at the IRS website. However, these policies are subject to modification.
  • You may be able to choose the state where your business will operate. If so, you might want to look at the state-specific small business tax rates. The Tax Foundation has additional information and recommendations.
  • If you are just starting your business, the SBA offers a guide to help you choose the best business structure.
  • Additional information is available on the IRS website about the Small Business Health Care Tax Credit. This tax credit provides a tax credit for small businesses that provide healthcare coverage to their employees. Find out if you are eligible, and how to calculate your credit.
  • The IRS has an information center that provides guidance on taxes for small businesses and self-employed.

The best states for small business taxes in the year 2022

You can make a decision about where to live and incorporate your company if you are considering moving, even if you haven’t started your own business. These are the top states for small business taxes.

  1. Wyoming
  2. South Dakota
  3. Alaska
  4. Florida
  5. Montana
  6. New Hampshire
  7. Nevada
  8. Tennessee
  9. Indiana
  10. Utah

For 2023, be aware of the changes

The American Rescue Plan Act of 2021 states that freelancers and small business owners who earn more than $600 through third-party digital platforms must include this amount in their income starting in 2022. This income will be included in a Form 1099K issued by platforms such as Amazon, Etsy and eBay. This information will be helpful as you gather your tax materials 2022 for filing in 2023.

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