Month: November 2022

Remember to consider your Section 199A deduction in your year-end tax planning. If you don’t, you could end up with an undesirable $0 for your deduction amount.

Here are three possible year-end moves that could, in the right circumstances, simultaneously (a) reduce your income taxes and (b) boost your Section 199A deduction.

First Things First

If your taxable income is above $170,050 (or $340,100 on a joint return), your type of business, wages paid, and property can increase, reduce, or eliminate your Section 199A tax deduction.

If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, which is the income that

• determines your eligibility for the Section 199A tax deduction,
• sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
• establishes when you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses your Form 1040 taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).

Strategy 3: Buy Business Assets

Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2022.

Bonus depreciation can help your Section 199A deduction in two ways:

1. The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when it gets your taxable income under the threshold.
2. The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases your Section 199A deduction.

The Section 199A deduction can get confusing. If you would like my help, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 18, 2022

Here’s an easy question: Do you need more 2022 tax deductions? If yes, continue reading.

Next easy question: Do you need a replacement business vehicle?

If yes, you can simultaneously solve or mitigate the first problem (needing more deductions) and the second problem (needing a replacement vehicle) if you can get your replacement vehicle in service on or before December 31, 2022. Don’t procrastinate.

To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2022. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.

Now that you have the basics, let’s get to the tax deductions.

1. Buy a New or Used SUV, Crossover Vehicle, or Van

Let’s say that on or before December 31, 2022, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four benefits:

• The ability to elect bonus depreciation of 100 percent
• The ability to select Section 179 expensing of up to $27,000
• MACRS depreciation using the five-year table
• No luxury limits on vehicle depreciation deductions

Example. On or before December 31, 2022, you buy and place in service a qualifying used $50,000 SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent x $50,000). Your maximum write-off for 2022 is $45,000.

2. Buy a New or Used Pickup

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2022, then this newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of up to 100 percent
2. Section 179 expensing of up to $1,050,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

• a GVWR of more than 6,000 pounds, and
• a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for either expensing of up to the $27,000 SUV expensing limit or 100 percent bonus depreciation.

If you would like to discuss vehicle strategies, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 15, 2022

All small-business owners with one to 49 employees should have a medical plan for their business.

Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you should.

When you have 49 or fewer employees, most medical plan tax rules are straightforward.

Here are six opportunities for you to consider:

1. Make sure to claim the federal tax credit equal to 100 percent of the required (2020) and the voluntary (2021) emergency sick leave and emergency family leave payments. You likely made payments that qualify for the credits.
2. If you have a Section 105 plan in place and have not been reimbursing expenses monthly, do a reimbursement now to get your 2022 deductions, and then put yourself on a monthly reimbursement schedule in 2023.
3. If you want to implement a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), but you have not yet done so, make sure to get that done correctly now. You are late, so you could suffer that $50-per-employee penalty should your lateness be found out.
4. But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, consider the Individual Coverage Health Reimbursement Arrangement (ICHRA). It’s got more advantages.
5. If you operate your business as an S corporation and want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance and (b) put that insurance cost on your W-2. Make sure the reimbursement happens before December 31 and you have the reimbursement set up to show on the W-2.
6. Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2022 and possibly in prior years.

If you need more insights into the opportunities described above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 11, 2022