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Tax Planning for Small Businesses

Fast approaching is everyone’s favorite time of year, Tax Season! It is time to plan, make last minute purchases, pay your final quarterly tax estimates, and get those 1099s out before January 31st.  While these numerous tasks can feel daunting, we are here to help!

IRS Form 1099

1099 – NEC (Nonemployee Compensation) Services $600 or more – legal, repairs, maintenance, etc.
1099 – MISC Rent, Royalty, Other Income (prizes/awards)
1099 – INT Interest Income
1099 – DIV Dividends and Other Distributions
1099 – R (Retirement Income) Retirement, Profit-Sharing Plan, IRA, Annuities, Insurance Contracts, Pensions, etc.
1099 – K (Payment Card and 3rd Party Network Transactions) Payments made to Merchants or Other 3rd Party Entities (credit card transactions) in excess of $600 or more

Businesses are responsible for making sure the correct tax forms are filled out and filed for the individuals or applicable business that completed work for them throughout the year. The most common forms that need to be filed and processed are the Form 1099s. There are multiple types of 1099s, each representing different types of payments businesses make monthly. Below is an easy chart to help distinguish some of the differences with links to the forms themselves. A 1099-NEC (nonemployee compensation) and 1099-K’s have a minimum filing threshold of $600. Previously, the 1099K had a $20,000 limit, however, with recent changes related to the American Rescue Act in 2021, the 2022 minimum filing threshold dropped to $600: requiring its own filing requirements.

Tax Planning and Projections

Now I know that tax season is pretty much no one’s favorite time of the year and they are relieved when it is done and over with. However, thinking about tax planning early can make a huge difference when it comes to your bottom line. Most businesses are too caught up in their day-to-day operations and are unable to give much thought to next year’s taxes until they are right around the corner.

Tax planning is much more than just an estimate of your year-end tax liability. It looks at the entirety of your financial situation and ensures that your business is working well to ensure you pay the least amount of taxes. The planning process takes many considerations into account. This includes the size and timing of purchases, expense planning, deduction, credit opportunities, and more. It also helps when selecting optimal investment and retirement plans. Knowing and understanding what your taxable income is projected to be opens the last few months of the year for any large changes that could be made and implemented.

Year-end Purchases

Equipment purchases are essential for small business owners. Whether this looks like technology, vehicles, buildings, or more, there is always something that could be used. As these assets age, they experience a normal set of wear and tear that makes their value depreciable. This depreciation can be an extra expense to offset some income for small businesses. Depending on the assets that are purchased, this will help distinguish what type of deduction could be used.

  • A Section 179 deduction gives you the largest deduction in the first year the asset was placed in service. In 2022 you can deduct up to $1,080,000 from your business income.
  • Bonus depreciation allows you to deduct a large percentage of the purchase price of eligible assets. The Tax Cuts and Jobs Act of 2017 doubled the deduction from 50% to 100%. This means you can deduct the entire purchase price of new or used equipment that was purchased and placed into service during the year.
  • MACRS deprecation stands for The Modified Accelerated Cost Recovery System. This tends to be the standard type of depreciation used for assets purchased by businesses. This allows a large tax deduction in the early years of the asset’s life and then a smaller deduction in the later years which, in return, allows the business to reduce their taxable income for that first year and increase it as the years go on.

Examples of assets to purchase at the end of the year

Business Vehicles – Dealerships normally have great end of year deals since they are trying to clear their inventory to take in next year’s products. Business vehicles can also have expenses such as gas and repairs deducted, or you can opt to deduct applicable business mileage personal vehicles.

Equipment – By the time December rolls around, use of a tax projection will provide better line of sight into your business’s bottom line, budget, and overall cash flow. A projection allows for a healthy conversation discussing current and future equipment purchases, replacements, and upgrades. Perhaps you were on the fence and uncertain if you could afford to purchase a new piece, this exercise can provide the line of sight of you need to ensure this is the best next step for you and your business.

Tech Subscriptions/Upgrading Systems – These are great items to do at year end, to implement new software and start with new companies. Normally when switching, there are set up and installation fees that could be expensed while utilizing available funds and expanding your business’s technology platform.

Technology hardware – Along with upgrading subscriptions and software, technology is every changing. One moment your computer and phone are working perfectly and the next it won’t turn on. Replacing these items at year end, and every three years thereafter, are great ways to keep your business running smoothly.

McKonly & Asbury has a wonderful and knowledgeable team dedicated to helping with your tax projection and planning needs. If you would like to talk to one of our professionals in our Entrepreneurial Support & Client Accounting Segment on this topic or any other business-related topic, please do not hesitate to contact us.

About the Author

Lindsay Young

Lindsay joined McKonly & Asbury in 2003 and is currently a Principal with the firm. She provides audit, tax, and consulting services, with an emphasis on family-owned business. Lindsay is a leader in the firm’s Outsourced Accounting… Read more

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