Small business taxes

DISCLAIMER: This article was written in 2022 and has not been updated. For more up to date information on economic impacts to small business funding, please read this recent article Small Business Tax Preparations Tips for Next Year

Avoid common tax mistakes and take advantage of all the deductions due to you

Small business taxes are confusing because deductions and other related things change often. This is especially true this year because significant tax legislation passed in 2018, and the COVID-19 legislation that followed in 2020 and 2021, including the American Rescue Plan Act, resulted in many changes for small businesses. Some of the changes are still in effect, while others are expiring.

This article will explain everything you need to know about small business taxes in 2022, so you can lower your tax obligation and avoid mistakes and penalties.

Tax changes for 2022

The following changes are in effect for this year. You must be aware of them to take advantage of the opportunities they present and avoid any consequences.

Social Security tax deferrals

For the 2020 tax year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act let employers defer their contribution to Social Security taxes due between March 27, 2020, and December 31, 2020.

The first 50 percent of the deferred Social Security taxes were due by December 31, 2021. The rest had to be paid by December 31, 2022. If you failed to make the first deferred payment on time, the Internal Revenue Service (IRS) will consider the deferral invalid. It will assess penalties on all deferred taxes going back to the original date they were due.

Tip: If you’re facing this issue, don’t go it alone. Your tax advisor will be able to help you resolve it properly so you don’t make things worse.

Employee retention credit

The Infrastructure Investment and Jobs Act eliminated the fourth-quarter 2021 employee retention tax credit. If you have not claimed this credit for that quarter, you will not be able to do so. If you already claimed it, you may be penalized unless you deposited the taxes by January 31, 2022, using IRS Form 941. This became a problem for many small business owners because they took the credit before the bill passed on November 15, 2021.

Tip: Because of the complexity of this issue, it could be a smart move to turn to a tax expert to help you with it.

Net operating rules

If your small business had a net operating loss in 2018, 2019, or 2020 that you are carrying forward into 2021, it will be limited to 80 percent of your taxable income. It could result in an unexpected tax payment and may impact your state tax calculations.

Example: If your company had taxable income of $100,000 in 2021 and a loss of $110,000 for 2020, the maximum carryover will be 80 percent of $100,000 or $80,000, rather than the full $110,000.

Excess business-loss limitation rules

Because of a limited time suspension of Tax Cuts and Jobs Act rules, companies could carry net operating losses back five years or carry them forward indefinitely in 2019 and 2020. However, the suspension ended, and the original rules are back in effect for the 2021 tax year. Because of this, you cannot deduct losses of more than $524,000 if you are married and filing jointly or $262,000 if you are single. This applies to all business income and losses, including Schedule C and pass-through entity income and losses.

In addition, W-2 wages may no longer be leveraged to offset business losses. Spousal income is taxed separately. This change may force you to pay taxes even if your business losses are bigger than your spouse’s income.

Interest expense limitation rule

Another pandemic tax rule suspension was the one related to interest expense limits. It’s now back in effect for the 2021 tax year. It limits taxable income to the current tax year. It also lowers the interest expense deduction from 50 percent to just 30 percent of your adjusted taxable income.

Contributions to charitable organizations

Unlike the tax changes I’ve already covered, the charitable contribution rule is good news for taxpayers for the 2021 tax year. If your business is structured as a C corporation, you can deduct donations of up to 25 percent of taxable income rather than the previous 10 percent. If you choose to do this, you must elect the increased corporate limit contribution-by-contribution.

Businesses structured as C corporations that donated food products to charities can qualify for deductions of 25 percent of personal income, up from 15 percent. For S corporations, sole proprietorships, and partnerships, the limit is based on the total net income from all the businesses that contributed.

Families First Coronavirus Response Act

The Families First Coronavirus Response Act (FFCRA) required that certain types of businesses provide paid sick and family leave to employees who were impacted by the coronavirus through March 31, 2021. Companies that made the payments qualify for tax credits of up to 100 percent for the total amount of sick-leave and family-leave pay, qualified healthcare plan expenses, and the employer’s share of FICA taxes for sick-leave expenses they incurred under the act. If you qualify for the tax credit, you must claim it for the first quarter of 2021.

Tip: Consult with your tax expert to make sure you’re calculating your business taxes correctly and not violating any rules or regulations or missing out on any opportunities.

Tax changes you may have missed

Here are some previous-year tax law changes you may not be aware of.

State and local tax (SALT) cap

As of 2020, you can only deduct up to $10,000 in state income tax and local property and income taxes from your federal taxes. This was awful news for small businesses in high-tax states like New York and California because it significantly increased their tax bills.

Deduction for pass-throughs and corporations

The law now provides a 20 percent deduction for pass-through businesses and corporations. Pass-throughs are small businesses structured as S corporations, limited liability companies (LLCs), sole proprietorships, and partnerships. They make up approximately 95 percent of businesses in the U.S. The only limitation is for certain service-based businesses, such as law and accounting firms with owners who earn high incomes. Your tax expert can advise you on whether you qualify for this deduction.

C corporations deduction increase.

A few years ago, the tax rate for corporations was lowered from 35 percent to 21 percent, significantly reducing their tax liability to keep more businesses from moving overseas.

First-year bonus depreciation

The first-year bonus depreciation deduction has been changed to 100 percent. That means businesses that make eligible equipment and property purchases can now deduct the total purchase price for the first year it’s in use instead of writing off a part of it every year over its useful life.

Tax tips for new business owners

If you started your business last year, you might not know how to file a business tax return. Here are key things you need to know.

  • You will need your tax ID number to file a tax return. This is your employer identification number if your business is a corporation or limited liability company or your Social Security number. In a few cases, other numbers can be used for filing.
  • On top of income taxes, you will owe 15.3 percent of your net self-employment income for self-employment tax. This covers what an employer would typically deduct from your paycheck to pay Medicare taxes and Social Security taxes.
  • All income, including cash payments, must be reported on your return, no exceptions.
  • If you pay health insurance premiums for yourself, you may be able to deduct them as a business expense.
  • If you can’t complete your taxes by April 18, this year’s tax deadline, you can file for an extension. If you do this, make it a point to pay your estimated taxes to avoid penalties and interest on the amount you owe.
  • Bonuses paid to employees are taxed differently from regular employee wages. They come with a bonus tax rate of 22 percent.
  • If you have a regular job and run a side business to earn extra income, the business income is considered by the IRS to be self-employment income and is taxed accordingly.

2022 tax filing and other deadlines

2021 federal tax returns and payments are due by midnight on April 18, 2022, for sole proprietorships, independent contractors, household employers, and C corporations. For S corporations and partnerships, taxes were due on March 15, 2022.

Quarterly tax due dates for 2022 for estimated income tax are:

  • Quarter one: April 18
  • Quarter two: June 15
  • Quarter three: September 15
  • Quarter four: January 15, 2023.

Types of small business taxes

Small business taxes are based on your business structure, but here are five types of small business taxes you must be aware of.

Income tax: Except for partnerships, all types of small businesses must file income tax returns every year. Partnerships file information returns.

Self-employment tax: This is a tax on your net earnings from self-employment. It goes toward your Social Security and Medicare obligations.

Employment taxes: If you have employees, you must pay taxes and complete forms related to their Social Security and Medicare, federal income tax withholdings, and federal unemployment tax. These are often referred to as payroll taxes.

Excise tax: Several types of taxes are included in this category. You must pay excise taxes if:

  • your business makes or sells certain types of products
  • you operate a particular type of business
  • you use specific equipment, facilities, or products
  • you are paid for qualifying types of services.

Common types of products that carry an excise tax are fuel, tobacco, and alcohol. Your tax expert can advise you on whether you’re responsible for excise taxes.

Estimated taxes: Many types of small businesses, including sole proprietors, partnerships, and S corporation shareholders, must make quarterly estimated tax payments. This applies if you don’t have taxes — or enough taxes — withheld from your paycheck.

Typical small business tax problems

Here are common mistakes small business owners make. Being aware of them can help you avoid them.

  • If you owe more than $1,000 in taxes, send quarterly tax payments to the IRS. It will help you prevent having to pay interest and penalties.
  • You may trigger an IRS audit if you claim too many deductions on your business tax return. If you take advantage of all the deductions you qualify for, leverage solid record-keeping practices, including keeping credit card receipts and bank account statements in case you’re audited.
  • If you estimate amounts for income and deductions rather than the actual figures, for example, using $5,000 rather than the actual $5,135, it could trigger an audit.
  • Waiting until the last minute to file taxes often causes small business owners to miss deductions.
  • If you work from home, as many people did during the pandemic, you could be missing a significant deduction if you don’t write off a portion of your home expenses that are used for business reasons. A tax professional can advise you on whether this is a smart deduction for you to take.
  • If you report a business loss year after year, the IRS could rule that your business is a hobby and disallow your deductions.
  • Never take tax deductions for illegal activities.

Don’t claim crazy tax deductions, such as massages to relieve work stress. These are a big red flag for the IRS.

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