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September 27, 2022

Year-End Tax Planning Ideas for Your Small Business

PODCAST: High-Efficiency Home Rebates

Separating Your Business From Its Real Estate

Large Unpaid Tax Bill Could Endanger Your Passport

Business Owners, Divorce and Potential for Fraud
Year-End Tax Planning Ideas for Your Small Business
Now that Labor Day has passed, it’s a good time to think about making moves that may help lower your small business taxes for this year and next. The standard year-end approach of deferring income and accelerating deductions to minimize taxes will likely produce the best results for most businesses, as will bunching deductible expenses into this year or next to maximize their tax value.

If you expect to be in a higher tax bracket next year, opposite strategies may produce better results. For example, you could pull income into 2022 to be taxed at lower rates, and defer deductible expenses until 2023, when they can be claimed to offset higher-taxed income. Here are some other ideas that may help you save tax dollars if you act before year-end.

QBI Deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2022, if taxable income exceeds $340,100 for married couples filing jointly (half that amount for others), the deduction may be limited based on: whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all of the QBI deduction by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout). You also may be able increase the deduction by increasing W-2 wages before year-end. The rules are complex, so consult us before acting.

Cash vs. Accrual Accounting

More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2022, it’s satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $27 million. Not that long ago, it was only $5 million. Cash method taxpayers may find it easier to defer income by holding off billings until next year, paying bills early or making certain prepayments.

Section 179 Deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2022, the expensing limit is $1.08 million, and the investment ceiling limit is $2.7 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.

The high dollar ceilings mean that many small- and medium-sized businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Just place eligible property in service by the last days of 2022 and you can claim a full deduction for the year.

Bonus Depreciation

Businesses also can generally claim a 100% bonus first year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. Again, the full write-off is available even if qualifying assets are in service for only a few days in 2022. Consult with us for more ideas These are just some year-end strategies that may help you save taxes. Contact us to tailor a plan that works for you.

Vince Schamber, CPA
D 920.337.4548
PODCAST
High-Efficiency Home Rebates

The recently signed Inflation Reduction Act included a lot of green provisions, most of them will affect your tax return but some will not. This podcast covers the rebates that are available for purchasing energy-efficient items and making certain improvements.
Separating Your Business From Its Real Estate
Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability and estate planning advantages of separating real estate ownership from the business.

Tax Implications

Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.

However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.

Protecting Assets

Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.

The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.

Estate Planning Options

Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.

Handling the Transaction

The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.

Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner's other assets (including the interest in the business) could be in jeopardy.

An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.

An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.

Proceed Cautiously

Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits. 

Charlie Wendlandt, CPA
D 715.384.1986
Large Unpaid Tax Bill Could Endanger Your Passport
If you have a large unpaid federal tax bill, beware. A 2015 law allows the U.S. State Department to deny your passport application — or revoke or limit your current passport — if the IRS certifies that you have a seriously delinquent tax debt (SDTD).

How large does the debt have to be to qualify? In 2022, you have an SDTD if the following are true: you owe more than $55,000 (adjusted for inflation) in back taxes, penalties and interest; the IRS has filed a Notice of Federal Tax Lien; and the period to challenge the lien has expired or the IRS has issued a levy.

If this is your situation, you may be able to avoid losing your passport by taking certain steps. Obviously, you can pay your tax debt in full immediately. If that’s not possible, you may be able to pay your debt on a timely basis with an approved installment agreement, an accepted Offer in Compromise or a settlement agreement with the U.S. Justice Department.

Also, you might be able to retain your passport by requesting a collection due process hearing regarding a levy, or by having collection suspended through a request for innocent spouse relief. Typically, the IRS won’t notify the State Department of an SDTD if there are extenuating circumstances, such as bankruptcy, identity theft, federally declared disasters or other hardships. Contact our firm for more information. 

Kyle Hundt, EA
D 608.793.3152
Tax Tip Tuesday - Video Short
Electric Vehicle Tax Credit Updates

This week, Hunter explains the immediate change to the existing tax credit for electric vehicles.
Business Owners, Divorce and Potential for Fraud
It’s difficult enough to divide a marital estate. But when a divorcing spouse owns a private business and attempts to artificially deflate its profits or hide assets, it may be time to engage a forensic accountant to investigate.

What to Ask

When working on divorce cases, fraud experts ask several questions about private business interests. For example, does a spouse own a cash business that may have income that’s not reported to tax authorities? Does the owner receive special perks or tax write-offs that affect the business’s profitability? Are numbers manipulated to affect the business’s value?
Also, does the business have subsidiaries or is it part of other business ventures? A business owner may be a silent partner in an entity where ownership isn’t obvious.

Look to the Income Statements for Clues

Anomalies in a business’s income statements may reveal possible deception, particularly:

  • Excessive write-offs,
  • Withheld revenue deposits,
  • A large one-time expense, or
  • A decrease in revenue with no related decrease in variable expenses.

Sudden changes that occur when the possibility of divorce arises may suggest unreported income or overstated expenses. However, these changes could also be due to external forces such as adverse market conditions.

When experts evaluate expenses, they may focus on amounts paid to owners and other related parties. These may include payments for compensation, benefits, rent, management fees, company vehicles and more. The owner-spouse also might try to flush personal expenses through the business.

Details in the Balance Sheet

Balance sheets may reveal whether an owner seeks to hide assets (for example, in an offshore account) or transfer them to a related party for less than market value. Inventory is particularly susceptible to manipulation and notes payable to shareholders — though often legitimate — may conceal income distributed to an owner.

Experts review the equity section for changes in the business’s ownership after the divorce filing and suspicious withdrawals or distributions from capital accounts. Controlling owners sometimes attempt to transfer ownership of business interests to friends or associates to deprive their spouses of the assets or portions of the business income.

Value Distortions

Although divorce can give rise to angry actions, most business owners would never stoop to falsifying financial records simply to deprive their ex-spouses of a fair division of marital assets. But if the value of a business seems distorted, contact us to help identify the causes and to suggest reasonable adjustments.

Chris Felton, CPA
D 262.404.2114
More Resources from CPA-HQ
Large Cash Business Transactions Must Be Reported to the IRS

When businesses receive large amounts of cash or cash equivalents, they may be required to report these transactions to the IRS.
Inflation Reduction Act Provisions of Interest to Small Businesses

The new Inflation Reduction Act provides small businesses with an incentive to increase their investments in research.
Self-Employed? Build a Nest Egg With a Solo 401(k) Plan

If you run a one-person small business, you might be able to build a bigger retirement nest egg with a solo 401(k) plan. Here are the basic rules.