Year-End Tax Planning Tips for Small Businesses

2021 wooden block transitioning to 2022

You still have time to significantly reduce this year's business federal income tax bill even with all the uncertainty about proposed tax law changes. Here are four possible moves to consider — but stay tuned for developments. Congress is currently considering some major tax changes. If approved, it's unclear when they will all take effect.    

1. Claim 100% First-Year Bonus Depreciation for Last-Minute Asset Additions

Thanks to the Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation is available for qualified new and used property that's acquired and placed in service in calendar year 2021. That means your business might be able to write off the entire cost of some or all of your 2021 asset additions on this year's federal income tax return and maybe on your state return, too.

Consider making additional acquisitions between now and December 31. Contact your tax pro for details on the 100% bonus depreciation break and exactly what types of assets qualify.

However, if significant tax-rate increases are enacted for 2022 and beyond, you could be better off forgoing 100% first-year bonus depreciation and, instead, depreciating newly acquired assets over a number of years. If tax rates go up, those future depreciation write-offs could be worth more than a current-year 100% write-off.

Fortunately, you have until the deadline for filing your current-year federal income tax return — including any extension — to decide which course to take. If your business uses the calendar year for tax purposes, the extended filing deadline will be October 17, 2022, for sole proprietorships and C corporations. The extended deadline will be September 15, 2022, for partnerships, limited liability companies (LLCs) and S corporations. Extending your return may give you more flexibility to react to future tax developments.      

2. Write Off New or Used Heavy SUV, Pickup or Van

The 100% bonus depreciation deal can have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That's because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.

Specifically, 100% bonus depreciation is available when the SUV, pickup, or van has a manufacturer's gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify a vehicle's GVWR by looking at the manufacturer's label, which is usually found on the inside edge of the driver's side door where the door hinges meet the frame. If you're considering buying an eligible vehicle, placing one in service before yearend could deliver a significant write-off on this year's return.

However, if significant tax-rate increases are enacted for 2022 and beyond, you could be better off forgoing 100% first-year bonus depreciation and, instead, depreciating newly acquired assets over a number of years. You have until the deadline for filing your current-year federal income tax return, including any extension, to decide whether claiming 100% first-year bonus depreciation is a good idea.  

3. Manage Current-Year Business Income and Deductions

If your business operates as a pass-through entity — such as a sole proprietorship, S corporation, partnership or LLC taxed as a partnership — your shares of various tax items are accounted for on your personal return and net income is taxed at your personal federal income tax rates.

As year-end approaches, if you expect to be in the same or lower federal income tax bracket in 2022 than you are in 2021, the traditional strategy of deferring taxable income into next year while accelerating deductible expenditures into this year makes sense. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2021 until 2022.

On the other hand, if you expect to be in a higher tax bracket in 2022 than you are in 2021, accelerate income into this year (if possible) and postpone deductible expenditures until 2022. That way, more income will be taxed at this year's lower rate instead of next year's higher rate.

4. Maximize the Deduction for Pass-Through Business Income

The deduction based on an individual's qualified business income (QBI) from pass-through entities is a key element of the TCJA. The deduction can be up to 20% of a pass-through entity owner's QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner's taxable income.

For QBI deduction purposes, pass-through entities include:

You can also claim the QBI deduction for up to 20% of qualified REIT dividends and up to 20% of qualified income from publicly traded partnerships.

Because of the limitations on the QBI deduction, year-end tax planning moves (or lack thereof) can increase or decrease your allowable QBI deduction. For instance, year-end moves that reduce this year's taxable income can have the unanticipated negative side effect of reducing this year's QBI deduction. Work with your tax pro to optimize your results.

Stay Tuned

In May, the U.S. Department of Treasury released its "Green Book," which contains Biden administration proposals. More recently, the House Ways and Means Committee released proposed legislation that includes some of President Biden's proposals, while tweaking and eliminating other changes proposed in the Green Book.

These proposed tax law changes include increased individual and business tax rates for some taxpayers, higher capital gains tax rates for high-income individuals, elimination of (or reductions in) certain tax breaks and much more. They have been met with opposition from Republicans and some Democrat lawmakers. So, it's currently uncertain which proposed changes, if any, will become reality.

For the latest developments, keep an open line of communication with your tax advisor. Depending on what happens in the coming months, your business should be ready to make last-minute tax planning moves right up until December 31.

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