Succeeding in Your Business: Year-end tax planning for 2022 (Part 1 of 2)

Cliff Ennico 

As we reach the end of the first “post-COVID year,” it’s hard to even think of another income tax deadline in three to four months.

But as Mark Twain once observed, the only two things you can count on in life are death and taxes.

The good news is that the post-COVID “return to normalcy” means your small business probably had a better year than it did the previous two. The even better news is that the federal Inflation Reduction Act extended some expiring business tax credits and introduced some new tax credits that may benefit your business.

I’m indebted to my good friend John D’Aquila, a certified public accountant and head of D’Aquila and Co. LLP in Jacksonville, Florida, (www.daquilallp.com) for sharing some of his year-end tax tips with me and allowing me to share them with you.

Section 179

Expensing and Bonus Depreciation Deductions

The two business tax deductions that present opportunities for reducing your business’s taxable income are the Section 179 deduction, where your business can elect to deduct the entire cost of certain property acquired and placed in service during the year, and the bonus depreciation deduction, where 100 percent of the cost of business property may be expensed. Under the Section 179 expensing option, your business can immediately expense the cost of up to $1,080,000 of “Section 179” property placed in service in 2022. This amount is reduced dollar for dollar (but not below zero) by the amount by which the cost of the Section 179 property placed in service during 2022 exceeds $2,700,000.

The bonus depreciation rules apply to all businesses unless the business specifically elects out of these rules. An election out might be preferable where a business expects a tax loss for the year and the bonus depreciation would just increase that loss, or where it might be advantageous to push depreciation deductions into future years. For example, if the owner of an LLC or S Corp to whom these deductions would flow expects to be in a higher tax bracket in future years, such deductions might be of more use in those future years. When applying both the Section 179 deduction and the bonus depreciation deduction to an asset, the Section 179 deduction applies first.

New and Modified Tax Credits

This is the IRA modified tax credits for electric vehicles and fuel cell vehicles. The law also enacted new tax credits for used and commercial clean vehicles. Multiple factors determine whether an EV purchased in 2022 qualifies for federal tax credits. Many EVs purchased before Aug. 16, 2022, qualify for a tax credit of up to $7,500 (with smaller amounts available for certain makes and models). Vehicles manufactured by Tesla or General Motors purchased in 2022 are not eligible for tax credits, as Tesla and GM have exceeded the 200,000-vehicle threshold that limits the number of tax credits that can be claimed for vehicles made by a manufacturer.

For vehicles purchased after Aug. 16, 2022, only vehicles for which final assembly occurred in North America qualify. The U.S. Department of Energy has released a list of model year 2022 and 2023 vehicles with final assembly in North America (https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit). EV purchasers who ordered a vehicle before Aug. 16, 2022, and take delivery of their vehicle at a later date may be able to claim tax credits for vehicles not assembled in North America if they had a written binding contract to purchase the vehicle. Most of the changes to the clean vehicle tax credit are effective starting in 2023, with the exception of the final assembly in North America requirement.

The energy investment tax credit was also extended by the IRA and could reduce your business’s federal tax liability by a percentage of the cost of a solar system installed during the tax year. Solar systems placed in service in 2022 or later, and that began construction before 2013, are eligible for a 30 percent ITC or a production tax credit based on a kilowatt-hour formula if they meet certain labor requirements or are under 1 megawatt in size.

Research and Development Deductions and Credits

The Tax Code provision allowing a deduction for research and development expenses expired at the end of 2021. Unless the credit is reinstated before the end of this year (Congress is currently debating doing that), such expenditures must now be amortized over five years. However, under the IRA, businesses that engage in certain kinds of research may qualify for an income tax credit based on its qualified research expenses. The credit is calculated as the amount of qualified research expenditures above a base amount that is meant to represent the amount of research expenditures in the absence of the credit.

Because some small businesses may not have a large enough income tax liability to take advantage of their research credit, the law allows that small business (a business with less than $5 million in gross receipts and that is under five years old) to apply up to $250,000 of the research credit toward its Social Security payroll tax liability. The IRA expanded the amount available for the credit from $250,000 to $500,000 for tax years beginning after 2022.

More next week ...

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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