By Drew Hinrichs, CPA, CEO of Engage Advisors
After another tumultuous year, uncertainty remains the watchword for 2022, especially when it comes to tax planning. Understanding how the recent changes in the tax code could affect your retirement and business strategies is critical to developing and implementing tax-saving strategies and preparing for a financially secure future. The following briefly summarizes some of the noteworthy changes this year and offers a few ideas for consideration.
Meals and Entertainment
For 2021 and 2022, business meals from restaurants are 100% deductible, rather than the usual 50%. Entertainment expenses remain non-deductible.
Deferred Payroll Taxes
If your company utilized the CARES Act to defer paying certain employment taxes for 2020, you should have made your first installment payment by December 31, 2021. The remainder needs to be paid by December 31, 2022.
Tax Rates and Business Structures
The corporate tax rate is now a flat 21%. There is also favorable treatment for pass-through entities, including S corporations and limited liability companies (LLCs). Now may be a good time to discuss your corporate structure with your tax and legal professionals.
Reduced Federal Income Tax Rate
Corporate business owners are still double taxed—paying corporate taxes and personal taxes. While the lower corporate tax rate should help ease a bit of this tax burden, business owners can avoid this double taxation by organizing their businesses as pass-through-entities, such as S corporations or limited liability companies (LLCs). There is no corporate income tax on business income for these entities. Instead, profits flow through to the individual tax returns of owners, paying income tax once at the individual tax rate. Sole proprietorships and partnerships also avoid double taxation and receive flow through treatment. But these latter two forms do not provide limited liability. Sole proprietors and partners may be personally liable for claims against their businesses.
Family Members on Payroll
If you haven’t done so already, consider adding your spouse and children to your payroll to help maximize business tax deductions. When you add your spouse to your roster, they are entitled to participate in your company’s retirement plan. Also, you can provide your spouse with family health insurance coverage, which will increase the business deduction for premium payments. As a dentist owner, any wages you pay children under age 18 are not subject to Social Security or Medicare taxes. Of course, your kids must work to earn the wages.
Home Office Deduction
If you have a dedicated home office, you can claim the home office deduction. You can deduct a portion of your mortgage interest, property taxes and insurance, and utilities equal to the percentage of your home’s square footage that’s dedicated to business use. Alternatively, the simplified method allows a maximum $1,500 deduction, depending on square footage used.
Section 179 Expensing for Property
If you own business property, Section 179 permits you to shelter taxable income from your real estate operations through accelerated depreciation deductions on different components of the property, such as furniture, carpeting, landscaping, or sidewalks. Expense limits have increased plus, changes under the CARES Act allow for immediate and 100% expensing of qualified improvement property placed in service starting in tax year 2018, including:
- Any improvement to a building’s interior but not building enlargements, elevators and escalators, or changes to the internal structural framework of the building
- Roofs, HVAC, and security and fire alarms
A Cost Segregation Study is the best way to segregate the different components of the property into categories that can be depreciated over a shorter time period. Getting a cost segregation study isn’t difficult to do and the tax benefits can be significant.
Learn How to Reduce Your Tax Burden
Our team of CPAs thoroughly study current tax law, so you don’t miss any opportunities to reduce your tax burden. Because each tax situation is unique, we urge you to contact Engage Advisors to discuss how these changes apply to your practice. We’ll work with you to create a tax plan that minimizes your tax obligation and helps you build a financially healthy practice.