The following summary includes areas where businesses may be able to reduce or defer taxes for 2022 as well as begin overall tax planning as we near year end.
Pass-Through Entity Tax
Several states have enacted legislation that allows a workaround of the $10,000 limit on state and local income taxes. These work arounds allow pass-through entities (PTEs) to pay and deduct state income taxes at the entity level instead of the individual level. Maryland and Virginia are among the nearly 30 states that have enacted workarounds to this deduction limitation for owners of pass-through entities. The tax must be paid in 2022 to take advantage of this deduction.
Bonus Depreciation
The 100% bonus depreciation stays in effect until January 1, 2023. At that point, the first-year bonus depreciation decreases by 20% per year through December 31, 2026. Taxpayers can still qualify for Section 179 deduction for eligible property and should consider the upcoming changes before yearend to maximize depreciation deductions.
Net Operating Loss Carryforward
Federal net operating losses (NOLs) generated can only be carried forward and may only offset 80% of current year taxable income. A business that anticipates a NOL may consider accelerating income or deferring expenses to create a small amount of income for 2022. Corporations should monitor their taxable income and submit appropriate estimated tax payments to avoid underpayment penalties as necessary.
Retirement Savings Plans
If you have not already established a retirement plan you may want to consider taking advantage of this benefit. Some plans must be established and funded by December 31, 2022, whereas others may be established and funded through the extended due date of the business tax return. Depending on your tax bracket this can provide significant tax savings by reducing taxable income.
Research & Development Tax Credit (R&D)
The R&D credit remains in place for 2022 (taxpayers should review the substantiation requirements for this credit); however, there are significant changes in the treatment of R&D expenses for 2022. Domestic research and experimentation expenses incurred after December 31, 2021, are no longer immediately deductible for tax purposes and must be amortized over 5 years and foreign research expenses must be amortized over 15 years.
Nexus caused by Telecommuting Workers
Many companies have changed their work from home policies and are allowing employees to telecommute. Employees working from home may create nexus in other states and require new reporting and payment obligations for both income and employment taxes. Companies should review the location of their employees and review the rules of each state.
Energy Tax Credits
The Inflation Reduction Act signed into law in August 2022 included modifications of many of the current energy-related tax credits and the introduction of new credits and monetization options. Companies should review the eligibility qualifications and consider if an investment in energy efficient property and sustainability initiatives fit their needs.
Click here for a more detailed year-end planning checklist.
