Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2022.
If you think you will owe the IRS some money, you can prepay some of your expenses. If your accounting method is cash-basis, the IRS allows you to pre-pay up to 12 months of qualifying expenses like rent on offices and machinery, lease payments on business vehicles, as well as insurance premiums (business and malpractice).
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 30, 2022, you mail a rent check for $36,000 to cover all of your 2023 rent. Your landlord does not receive the payment in the mail until Tuesday, January 3, 2023. Here are the results:
You get what you want—the deduction this year.
The landlord gets what he/she wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
Antother strategy to reduce your taxable income for this year is stop billing your customers, clients, and patients until after December 31, 2022. (Assuming that you or your corporation is on a cash basis and operates on the calendar year.)
Customers, clients, and insurance companies generally don’t pay until billed. Not billing customers and clients is a time-tested tax-planning strategy that business owners have used successfully for years.
Example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He postponed paying taxes on his December 2022 income by moving that income to 2023.
Buy equipment or machinery and place it in service before December 31 and get a deduction for 100 percent of the cost in 2022.
This qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.
If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
But suppose you operate your business as a corporation and are the personal owner of the credit card. In that case, the corporation must reimburse you if you want the corporation to realize the tax deduction, which happens on the reimbursement date. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.
If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.
If you are starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing successful business.
You used to be able to carry back your NOL two years and get immediate tax refunds from prior years, but the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.
What does this all mean? Never stop documenting your deductions, and always claim all your rightful deductions. Unless, you are planning to buy a house, in which case, the strategy will be different.
QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers)—if you place the improvement in service after the date you place the building in service.
The big deal: QIP is not real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2022, you must place the QIP in service on or before December 31, 2022.
Planning note. If you have QIP property on an already filed 2019 return that you did not amend, it’s on that return as 39-year property. You need to fix that—and likely add some cash to your bank account by making the fix.