3 Year-End Tax Saving Moves to Make in 2022Submitted by JMB Financial Managers on November 16th, 2022
Year-end is quite possibly the most hectic time for small business owners, and 2022 is no different. Even if the year unraveled differently than planned, it is time to look back, measure how the business did, and begin planning for 2023.
It’s also a time to make year-end tax moves to help reduce your tax burden for the current tax year and end the year as fiscally responsible as you possibly can, regardless of your financial situation.
1. Make Any Last-Minute Purchases
Review your financial statements to evaluate your company’s health. After analyzing your revenue streams, determine if you should purchase any big-ticket items before year-end to minimize your gross income. Taking this step reduces your profits and therefore, your taxes.
Business owners should consider making investments in their business (by purchasing business property/equipment) and consult with their tax professional about the potential tax break from doing so.
- Section 179 deduction – An immediate deduction of the entire cost of certain property is available for the year the property is purchased. The maximum Section 179 expense is $1,080,000 ($27,000 limitation on cost of a sport utility vehicle) in 2022. The deduction phases out when total property purchased for the year exceeds $2,700,000.
- Bonus depreciation – Businesses may immediately deduct 100% of the cost of new or used eligible property in the year it is purchased, beginning 2018 through 2022. For property purchased from 2023-2026, bonus depreciation is decreased to a lower percentage ranging between 80% and 20%.
2. Year-end Retirement Plan Contributions
If you haven’t made contributions to your retirement plan, now is the time. Take this opportunity to max out your plan contributions, earn a tax deduction, and lower your taxable income before the end of 2022.
If you are a business owner and don’t have an employer-sponsored retirement plan set up, you can do so before December 31st to take advantage of the tax benefits offered to small businesses that establish new retirement plans. The SECURE Act increased the dollar amount of the credit cap for the small employer pension plan startup costs credit to the greater of (1) $500, or (2) the lesser of: (a) $250 for each eligible non-highly compensated employee, or (b) $5,000. The credit applies for up to three years and may not exceed 50% of certain costs paid or incurred in connection with starting a retirement plan (e.g., setup, administration, and retirement education). The increase is effective for tax years after December 31, 2019.
Other important updates regarding the SECURE Act and retirement plans:
- The SECURE Act created a new business credit for an eligible employer that establishes an automatic contribution program under a qualified plan or adds an auto-enrollment feature to an existing retirement savings program. The $500 credit applies to tax years beginning after December 31, 2019.
- The deadline for a business to establish a qualified retirement plan is the business’ tax filing deadline plus extensions. Business owners should consult their tax professional for the deadline applicable to their business. But in general, this change gives employers more time to establish a plan for a particular year.
- With the passage of SECURE, existing 401(k) plans now have 12 additional months to add a safe harbor feature. A safe harbor nonelective provision may now be adopted retroactively to the start of the year so long as the amendment is signed 30 days before the plan year-end (December 1 for calendar year plans). Those who miss the 30-day deadline or wait for the outcome of non-discrimination testing generally performed at or near close of the year, have an additional grace period: they may now elect the safe harbor nonelective status up until the following plan-year end so long as the amount of safe harbor contribution is increased from the 3% of compensation to 4%.
- The last day to establish a SEP IRA plan is the business’ tax return due date, plus extensions.
- A SIMPLE IRA plan must be established no later than October 1 of the year in which it is first effective, for example, October 1, 2022, for a new 2022 SIMPLE IRA. For new employers that came into existence after October 1 of the year, the SIMPLE IRA plan can be established as soon as administratively feasible after the business came into existence.
- Contribution Limits – For 2022, 401K plans allow an elective contribution of $20,500 with additional catch-up of $6,500 for those over age 50. For an IRA (Traditional and Roth), the 2022 limit is $6,000 with $1,000 catch-up contribution for those over age 50.
We work with many small business owners to establish retirement plans. If you’re interested in learning more about the different benefits each type of retirement plan offers to small businesses, please reach out to us.
3. Make Charitable Donations
There’s no better time to make charitable contributions than during the holiday season. Not only is it a generous move that charitable organizations will appreciate, but it is also a good tax move for your business, especially under the rules of the 2017 Tax Cut and Jobs Act. It is also an opportunity to eliminate any capital gains taxes you may be facing.
Be sure to keep documentation of any donations you make as they are tax deductible. Donations don’t always come in check form; these tax breaks can also be material items that can be deducted at market value.
Save More by Implementing Tax-Saving Strategies
If you're looking for more information on reducing your taxable income, download our complimentary guide, 3 Tax-Saving Solutions.
If you're looking for more resources, we’ve got you covered:
- How to Lower Your Taxes – A Guide for Independent Contractors and the Self-Employed
- 3 Easy Ways to Improve Your Business Finances
Start Planning for 2023
The new year is right around the corner, and if 2022 taught us anything it’s that we should be prepared. Take proactive steps and start planning sooner rather than later. After making all of your year-end tax moves, don’t forget that creating a budget to follow in the upcoming year should be a top priority.
As always, if you find yourself in need of assistance, reach out to a financial professional to see how they can benefit you.
About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A CERTIFIED FINANCIAL PLANNER TM, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.
Connect with Jack on LinkedIn or follow him on Twitter.