Small businesses need to consider these actions now to lower 2022 taxes
(This article originally appearerd in the Philadelphia Inquirer)
Did you, like me, grumble at the amount of taxes you had to pay this past year? Now’s the time to do something about it, at least for 2022.
March 15 was the deadline day for small businesses that filed “pass-through” returns and next week (April 18) is the tax deadline for individuals and corporations, which means — unless you extended your returns until October — your, 2021 tax year is pretty much over. But instead of putting taxes out of your mind — the federal, state and city government can eat up from 20% to 40% of your income — we should all be thinking ahead. Because the more planning we can do for 2022, the less in taxes we may have to pay.
So here are some actions that small-business owners can take right now to save on this year’s taxes.
For most accountants, busy season is almost over. Which is why you should be setting up an appointment to meet in May. Why? Because by that time the year is almost half-over and there’s still plenty of time to plan your tax moves. Also, by sharing with your accountant how your business has been doing this year, and your projections for the rest of the year, better tax estimates can be made, which should help to avoid surprises.
Like most small businesses, you’re probably making quarterly estimated payments. Don’t ignore them. But even more important, consider adjusting them based on how the year is going and your ongoing conversations with your accountant.
This credit can provide an enormous tax savings for your company this year — and through 2025. The credit — which can be as much as $9,600 and offsets the amount of taxes you owe — may be available to you if you hire someone out of prison, off welfare, leaving the military or who has been unemployed for more than six months. Talk to your accountant before you hire that person to see whether that new employee is eligible and how much of a credit can be earned, and perhaps share some of those tax savings with the employee in the form of a hiring bonus.
This year, most small businesses can deduct as much as $1.08 million when capital equipment — including machinery, furniture and most technology products — is purchased. Investing in capital equipment is a great way to hedge against inflation. What’s even more attractive is that you can finance the equipment now while interest rates are still relatively low and, as long as you put the asset into service by year end, you realize the full deduction this year.
If you don’t have a 401(k) plan in your company, get one set up. The 2019 Secure Act provides tax credits for companies with fewer than 100 employees to do so. If you have a 401(k) plan, try to save the maximum amount. Most taxpayers this year can save as much as $20,500 individually and as much as $61,000 if a company matches. Most important: Encourage your employees to participate because the more they save, the more you’ll be able to save without failing the government’s year end discrimination testing.
If you don’t have a 401(k) plan, you can set up a simplified employee pension plan (SEP) and possibly put additional amounts into an IRA.
If you save money in a Roth IRA or a 529 plan, your income has already been taxed, but future earnings and gains from these investments won’t be. A Roth IRA is limited to certain income levels, but if eligible, after-tax amounts can be saved and all future withdrawals are tax free. A 529 plan will enable you to save money for yourself or other family members that will grow tax free as long as it’s used for higher education, or private or religious school on withdrawal.
Through 2025, you’re allowed to deduct as much as $5,250 per employee when you help pay for their student loans. You may also be able to deduct up to $5,250 if you reimburse them for other education expenses. There are generous tax credits for employers who build child-care facilities and, separately, an employer can exclude from an employee’s income (up to a limit) certain qualified child care expenses (and save themselves employer taxes).
The IRS also allows you to deduct as much as $14,890 to help employees with adoption expenses, too. All of these amounts would not be taxable to your employees.
If you have a high-deductible health insurance plan, make sure to set up health saving accounts for yourself and your employees so you can all save pretax money and use those funds for non-reimbursed medical expenses such as acupuncture, vision and infertility treatments. Or, if you’re eligible, consider setting up health reimbursement accounts to put pretax money away for employees to buy health insurance on their own.
No one likes to pay taxes. But with a few proactive steps, your company’s tax liability can be reduced … and you may be able to leverage the government to help provide better employee benefits, too. All it takes is making your plans now, rather than waiting until the end of the year.
Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.