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The fourth quarter of fiscal year 2021-2022 is the best time for you, as a business owner, to be proactive and plan your taxes to minimize your tax liability for 2021. Business tax planning should be performed more than once a year. In addition, depending on the situation, the federal and state governments may extend the tax deadline, giving you more time to prepare and report your 2021 taxes by the middle or end of 2022. However, whether or not it is It is always best to have several tax strategies on hand. , evaluate them and execute them so you don’t have to make last-minute improvements in a rush.
But for prepare for the next busy tax season, you should be aware of the recent tax changes or those which should come into force in 2022. This will help you control your tax situation and better manage your 2021 taxes.
Now let’s discuss some corporate tax changes to make it easier to prepare your tax return and make the tax season less hectic.
In September of this year, the Ways and Means Committee proposed a corporate tax rate of 26.5% (up from 20%), which is slightly lower than the 28% suggested by President Joe Biden. The new corporate tax rate is higher than China’s 25% and the developed countries’ average tax rate of 23.5%. For businesses with income below $ 400,000, the tax rate would be 18%.
While there have been several changes, the commission also proposed an increase in the minimum tax rate on foreign income of American companies from 10.5% to 16.6%, when the president had asked for 21%.
SECURE 2.0 law
The proposed bill also includes a change in the minimum distribution required (RMD) age, raising it from 72 to 75. The new tax laws would also require employers to have automatic enrollment plans such as 401 (k ) and increase the small business tax credit to initiate automatic enrollment pension plans.
You should watch out for Secure Act 2.0, as it might be part of a bigger new tax package that might hide more provisions as well as several changes. The best thing you can do right now is to review your company’s current retirement plan in case you have one, or you may be wondering whether you should go for a retirement plan now or wait for the new rules. be promulgated before choosing one.
The deduction limit for business meals is increased from 50% to 100% of costs under IRC Section 274 (m) by the CAA. The change applies to expenses you paid in 2021 and 2022; however, this rule only applies to meals you have provided in restaurants. The CAA has not changed any rules regarding entertainment expenses, still keeping them non-deductible.
Tax breaks for charitable contributions under the CARES Act have been extended; C corporations can claim a cash contribution deduction of up to 25% of taxable income. The deduction for food inventory donations is increased from 15% to 25%. While these breaks can be used for additional perks, you have more time to deal with them as both have a one-year extension.
Intermediate business income
The increased tax on business owners passed on could be larger, most likely due to changes to the deduction for qualifying business income. The current personal deduction based on business income is 20%; there could be a limitation for high income taxpayers or completely eliminated.
Currently, Net Investment Income Tax (NII) of 3.8% only applies to Limited Partners. The proposal would impose tax on all income transmitted, regardless of the owner’s role in business activities.
Minimum Tax on Corporate Profits (CPMT)
Companies reporting more than $ 1 billion in profits to shareholders would have to pay an alternative minimum tax of 15% on adjusted financial statements in accordance with the proposed law. This applies to income and preserves the value of general trade credits, allowing corporate taxpayers to claim a foreign AMT tax credit. The new law is expected to come into force after December 31, 2022.
What should you do
Regardless of your type of business, the tax rates that are subject to change in 2022 will have a significant effect on your taxes. Since the proposal would increase the corporate tax rate from 21% to 26.5%. So what you can do is instead of going the usual route of trying to defer income to the end of the year, you can speed it up to 2021 so that it can be taxed. at a lower rate. Likewise, you can consider deferring the costs of purchasing equipment until January so that the write-offs are worth applying. There are many ways to strategically plan your taxes and save more.
However, you should prepare such strategies based on your specific situation, taking into account your income and expenses, both current and projected. Fortunately, you now have more time to file your federal income tax return for the current year, giving you plenty of time to develop a tax preparation strategy.
If your business follows the calendar year for tax purposes, the extended filing deadline is;
- 10/17/22 – for sole proprietorships – Form 1040
- 10/17/22 – for C companies – Form 1120
- 09/15/22 – for partnerships – Form 1065
- 09/15/22 – for LLCs taxed as a partnership – Form 1065
- 09/15/22 – for S companies – Form 1120-S
Be up to date on tax laws
If you do taxes yourself, the same advice would be for you too. Prepare a plan for managing estimated tax returns and prepare to pay attention to any tax changes to maximize your deductions and minimize tax payable.
Every business, accounting firm, and CPA firm should have a qualified and knowledgeable accounting staff to remove or solve the complexity of tax return preparation. First and foremost, you need to make sure that your staff is aware of all tax changes and their impact on your taxes. If needed, you can use tax software that can quickly perform most tax-related administrative tasks. If the software is out of your budget or out of your interest, your next best action may be outsourcing of tax preparation. Since outsourcing can be a cost effective solution, it may be the best fit if recruiting or training is not possible for you at the moment.