2022 Tax Planning for Individuals and Businesses

2023 is rapidly approaching and most potential strategies to reduce your 2022 tax liability expire on 12/31/22. Now is the time to review your situation and implement any potential tax savings measures!

Both Individuals and Business owners have a number of potential moves that they can make prior to year-end.  Below are a few of the most common:

                                                                  INDIVIDUAL TAX PLANNING

• If you expect to be in the same or lower tax bracket next year consider accelerating deductions into 2022 and/or deferring receipt of taxable income. (If you expect to be in a higher tax bracket you may benefit from doing the reverse.)  
• Assuming that you will itemize, one way to accelerate deductions would be to increase your charitable donations prior to year-end. Any donations made before 12/31/22 will be deductible on your 2022 return. 
• The Tax Cuts and Jobs Act (TCJA) raised the standard deduction. Depending on your individual situation, “bunching deductions” may make sense in any given year. An example of this strategy would be a taxpayer who normally gives a certain amount annually as a charitable contribution to a specific organization. During 2022, they would make their normal donation and then on or before 12/31/22 they would “pre-pay” all of their 2023 donation amount to move the entire amount into 2022.
• Related to charitable donations, if you are planning on making a substantial gift you may want to donate appreciated stock.  The benefit is two-fold; you will get a deduction for the full market value of the stock AND you don’t have to pay capital gains tax on any unrealized gain. 
• Donor Advised Funds are also an option that are becoming more popular under the TCJA. Taxpayers with significant assets to donate in the future may want to consider a DAF to accelerate the deduction into the current year.
• Consider maximizing 529 Plan contributions for children and grandchildren. The funds will grow tax free, and will be distributed tax free in the future provided they are used for qualified education expenses. In addition, under the expanded definition of qualified education expenses, you can now use 529 plan assets to pay for elementary or secondary school costs. (Bonus: Georgia residents using a Georgia Path2College 529 Plan are also eligible for a current year deduction on their state income tax return.)
• Take advantage of the increased limits by contributing more into an IRA or other retirement account.  401(k) contributions must be deferred from your paycheck before 12/31/22, IRA contributions can be made up until 04/15/23.
• If you are eligible for an HSA account consider contributing to it as well. 
• Harvest portfolio gains and/or losses. If you have gains in your portfolio, are eligible for the 0% capital gains rate, and expect to be subject to the higher capital gains rates in the future, you may want to sell now. Then repurchase the securities you want to keep and increase your cost basis to the new purchase price. If you have securities that are worth less than you paid for them and you are ready to reinvest the money elsewhere, you may want to go ahead and sell.  “Harvesting” the capital loss before year end will allow you to offset the loss against any taxable capital gains in your portfolio. If you do harvest losses, make sure that you are aware of the “wash sale” rules and wait at least 30 days if you are going to repurchase a substantially identical security.  (The wash sale rule does not apply to harvesting gains.)
• Use your Flex Plan at work. It is a “use it or lose it” account. Generally, you must use it by 12/31/22 unless your plan allows for the optional two and a half month carryover or $500 carryover provisions. 
• Out of Pocket Medical expenses will need to exceed 7.5% of your 2022 adjusted gross income in order to be deductible this year.
• Low to moderate income earners can take advantage of the expanded Saver's Credit.
• Consider converting a Traditional IRA to a ROTH IRA. You pay tax in the year of conversion but all future growth will be tax free.

                                                                    BUSINESS TAX PLANNING

• Accrue Eligible Compensation - Accrual-basis employers can often take a 2022 deduction for accrued bonuses and vacation compensation payable to (unrelated) employees, as long as the bonuses meet certain IRS criteria and are paid within 2.5 months of the end of the company's tax year (March 15th for a calendar year employer).
• Defer Taxable Income & Accelerate Deductions - If you are able to defer taxable income until next year or accelerate business deductions into the current year, that's often the best way to reduce your overall liability. 
• Depreciation - If you need to buy business equipment it's important to know exactly what your depreciation deduction will be for the year. These rules have changed significantly under the new Tax Cuts and Jobs Act (TCJA) and eligible qualified property now yields a 100% 1st year federal depreciation deduction. (This drops to 80% in 2023.) Auto depreciation limits have also been increased for both passenger and heavy (over 6,000 pounds) vehicles. 
• Retirement Plan Options - There are many different qualified retirement plans to choose from and they all (with the exception of a SEP IRA) have to be established by 12/31/22 if you would like to make a contribution for the current year. A SOLO 401(k) is often the best choice if you are the only employee (or you and your spouse are the only employees) in your business and you want to maximize your annual contributions. 
• Estimated Tax - Ensure that you have enough tax paid in to avoid penalty on your 2022 tax return. To avoid a penalty on your 2022 return, you need to have at least 90% of your 2022 tax liability paid in by year end. If you are not sure what your tax liability will be, the alternative approach is to pay in 100% (110% if your AGI is greater than $150,000) of your 2021 liability.
• Auto Mileage – Make sure you are tracking all of the necessary information to take a deduction for business mileage. If you don’t want to deal with a physical mileage log there are numerous apps available that can help you keep up with mileage throughout the year. The IRS business mileage rate for 2022 is a blended rate of 58.5 cents per mile Jan-Jun and 62.5 cents Jul-Dec.
• QBI Deduction Planning - Section 199A of the new tax code created a unique business deduction for Qualified Business Income that allows business taxpayers (other than C-Corporations) a deduction generally equal to 20% of their QBI. The new regulations are complex and careful consideration should be given to the issue by those taxpayers who may be in jeopardy of losing this specific deduction. Income caps and other limitations often apply.

In addition to analyzing potential tax saving strategies, the end of the year is a good time to review other common issues and make sure you are in compliance. 

• S-Corp Reasonable Compensation - All S-Corporations shareholders that perform services for their business are owners as well as employees, and as employees they must receive "reasonable compensation" for their services rendered to the S-Corporation. This compensation should be paid via a regular W-2 salary. There is no set guideline for exactly how much this amount must be, but it should be on par with industry standards for salaries paid at other companies for similar services. There are 9 factors the IRS would look at if it ever came up, with number 8 likely being the heaviest weighted factor: (1) Employee qualifications; (2) The nature, extent, and scope of the employee’s work; (3) The size and complexity of the business; (4) Prevailing general economic conditions; (5) The employee’s compensation as a percentage of gross and net income; (6) The employee-shareholder’s compensation compared with distributions to shareholders; (7) The employee-shareholder’s compensation compared with that to non-shareholder employees or paid in prior years; (8) Prevailing rates of compensation for comparable positions in comparable concerns; and (9) Comparison of compensation paid to a particular shareholder-employee in previous years where the corporation has a limited number of officers. I would also recommend having something in writing in your company records, documenting how you arrived at the salary figure, using Salary.com or an equivalent way of tracking and comparing the salary amount. 
• S-Corp SE Health on W-2 - If you are an S-Corporation owner with self-employed health insurance premiums, make sure that it is properly reflected on your W-2 so that you can maximize the deduction on your personal return. 
• Guard Against Co-mingling of Funds - If you have a business, even if it is a small sole proprietorship, the IRS requires the business to keep good books and records to distinguish between business finances and personal finances. This means that you MUST have a separate bank account for your business and ALL items of income and expense should be run through the business account. Failure to distinguish between business and personal, either by running personal income/expenses through a business account or running business income/expenses through a personal account, is called "co-mingling funds" and opens up the business to severe penalties by the IRS. A separate issue, but just as important, co-mingling funds can also increase your liability in a lawsuit. A lawsuit brought against a business that has co-mingled funds can go after not only the business assets, but also the personal assets of the business owner. 
• Accounting - Maintaining clear distinctions between business and personal accounts not only protects the business from lawsuits and IRS penalties, it also makes your monthly bookkeeping and accounting much easier and ensures accuracy. 
• Worker Classification - As you hire new workers in your business make sure that you are classifying them correctly at the onset. A misconception among some small business owners is that you can choose whether to 1099 a worker or issue them a W-2. This is not only incorrect; it can be a very expensive mistake. Incorrectly classifying a worker as an Independent Contractor that receives an annual 1099-MISC will subject the business to additional taxes and penalties from both the IRS and the Department of Labor. If you have an employee you must add them to payroll for all payments to them. If you truly do have independent contractors, make sure that you structure the relationship so that it is obviously a business to business relationship. All subcontractors should sign an independent contractor agreement form and have their own business account set up before payments are made to them. Ideally, they will have their own business entity set up, invoice your business for services rendered, and maintain their own business license. If you are unsure about how to classify a worker please reach out with any questions. The IRS has a 20 point checklist with questions that are used to determine proper classification. For more information you can visit the IRS web article about the issue.
• 1099 Issuance - A very basic outline of the rule is that any unincorporated workers/vendors not classified as employees must be issued a 1099-NEC for payments of at least $600 for services, rent, commissions, etc. Please give us a call or refer to the IRS instructions for more detailed information.
• Meals & Entertainment - The deduction for business entertainment has been eliminated. Please see our previous article here for more information about meals and entertainment deductions under the TCJA.
• Hobby Losses - The Schedule A deduction for expenses related to a "hobby loss" has also been eliminated under the TCJA. It's more important than ever to make sure that your side business activity is structured as a real business so that you can deduct any potential losses.
• Reminders for Georgia Companies - (1) Renew your county/city business license by year end, (2) Issue 1099’s and W-2’s by January 31st, (3) File your corporate or partnership return by March 15th, (4) Renew your LLC or Corporation by April 1st, and (5) File your county business personal property tax return by April 1st. 

​This is general information and a brief summarization of complicated tax issues which are often subject to many exclusions and limitations. We make every effort to verify the accuracy of all information but we do not guarantee or warranty advice disseminated over the internet. Please give us a call to discuss potential strategies and ensure they make sense for your specific situation.  ​