Small business taxes may seem like an annual event. However, small business owners need to stay updated on recent changes to tax law to file correctly or they can make the best decision, which is to hire a professional accountant.
The Tax Cuts and Jobs Act, passed in December 2017, made the biggest changes to the tax code in decades. The new law lowered corporate tax rates and created a new deduction for pass-through businesses, such as sole proprietorships, LLCs, and partnerships.
For small business owners, it’s important to understand how these changes will impact their business taxes. For example, if you own a pass-through business, you may be eligible for the new 20% deduction. This deduction can save you a significant amount of money on your taxes.
In this article, we’ll explain everything about filing small business taxes in 2022.
What are Some Notable Tax Changes for Small Businesses in 2022?
Deferred Social Security Taxes:
If you owe deferred Social Security taxes, you may be able to deduct them on your 2022 tax return. This deduction is available for taxes owed in 2021 and 2020.
Qualified Business Income Deduction:
The qualified business income deduction is a new deduction created by the Tax Cuts and Jobs Act. This deduction allows business owners to deduct up to 20% of their qualified business income from their taxes.
To qualify for this deduction, your business must be a pass-through entity (such as a sole proprietorship, LLC, or partnership). You also must have less than $157,500 in taxable income if you’re single or $315,000 if you’re married and filing jointly. If you’re above these income thresholds, you may still be able to take the deduction, but it will be subject to certain limitations.
The standard deduction has been increased for the tax year 2022. The new standard deduction amounts are $12,400 for single filers, $18,800 for head-of-household filers, and $24,800 for married couples filing jointly.
Note that the standard deduction is only available if you do not itemize your deductions. If you itemize your deductions and your total deductions are more than the standard deduction amount, you’ll receive a bigger tax break by itemizing.
Some Itemized Deductions Have Been Eliminated or Reduced:
The Tax Cuts and Jobs Act eliminated or reduced several itemized deductions. These include:
- The deduction for state and local taxes (also known as the SALT deduction)
- The mortgage interest deduction
- The medical expense deduction
- The charitable contribution deduction
If you itemize your deductions, these changes may impact how much you’re able to deduct on your taxes.
Alternative Minimum Tax (AMT):
The alternative minimum tax (AMT) has been repealed for the tax year 2022. The AMT is a parallel tax system that imposes an alternative tax on certain taxpayers. The purpose of the AMT is to ensure that wealthy taxpayers pay at least a minimum amount of tax.
Before the Tax Cuts and Jobs Act, the AMT applied to a wider range of taxpayers. The new tax law has significantly reduced the number of taxpayers who are subject to the AMT.
Employee Retention Tax Credit:
The employee retention tax credit is a new tax credit created by the CARES Act. This credit is available to businesses that are experiencing financial hardships due to the coronavirus pandemic.
To be eligible for the credit, your business must have experienced either a decrease in revenue of more than 50% when compared to the same quarter in the prior year, or you must have been forced to suspend operations due to government orders related to the pandemic.
If you’re eligible for the credit, you can receive a refundable tax credit of up to $5,000 per employee.
Net Operating Rules:
The Tax Cuts and Jobs Act made several changes to the way businesses can deduct their net operating losses (NOLs). The most notable change is that NOLs can now only be carried forward, not backward. This means that if your business has an NOL in 2022, you can carry it forward to future years and use it to offset your taxable income in those years.
In addition, the Tax Cuts and Jobs Act created a new limit on the amount of an NOL that can be used to offset taxable income in a given year. The new limit is 80% of taxable income.
These changes mean that businesses will no longer be able to use NOLs from prior years to offset their taxes.
Excess Business-Loss Limitation Rules:
The Tax Cuts and Jobs Act created a new rule that limits the number of business losses that can be used to offset other income. This rule applies to businesses that are considered “pass-through” entities (such as sole proprietorships, LLCs, and partnerships).
Under the new rule, businesses can only deduct up to $250,000 in business losses if they’re single filers, or $500,000 if they’re married and filing jointly. Any business losses above these amounts can be carried forward to future years.
Interest Expense Limitation Rule:
The Tax Cuts and Jobs Act created a new rule that limits the amount of interest expense that businesses can deduct from their taxes. The new limit is 30% of adjusted taxable income.
This means that if your business has an interest expense of $100,000, you can only deduct $30,000 of it from your taxes. The remaining $70,000 can be carried forward to future years.
The Tax Cuts and Jobs Act created a new tax break for businesses known as bonus depreciation. This allows businesses to immediately deduct 100% of the cost of certain property (such as machinery or equipment) in the year it’s purchased.
Before the Tax Cuts and Jobs Act, businesses could only deduct 50% of the cost of property in the year it was purchased. The new law has made it possible for businesses to immediately deduct the full cost of certain properties.
This change is temporary and is set to expire at the end of 2026.
Section 179 Expensing:
The Tax Cuts and Jobs Act increased the amount that businesses can expense under Section 179 of the tax code. This allows businesses to immediately deduct the cost of certain property (such as machinery or equipment) in the year it’s purchased.
Before the Tax Cuts and Jobs Act, businesses could only expense up to $500,000 of property under Section 179. The new law has increased this limit to $1 million.
This change is temporary and is set to expire at the end of 2026.
New Markets Tax Credit:
The Tax Cuts and Jobs Act created a new tax credit for businesses that invest in certain low-income communities. The credit is worth up to 26% of the investment.
To be eligible for the credit, businesses must make an equity investment in a “qualified opportunity zone” (QOZ). A QOZ is defined as a census tract where at least 20% of the population lives below the federal poverty line.
The tax credit can be used to offset either ordinary income or capital gains tax.
Work Opportunity Tax Credit:
The Work Opportunity Tax Credit (WOTC) is a tax credit for businesses that hire certain groups of people who face barriers to employment. These groups include veterans, ex-felons, and recipients of food stamps (SNAP).
The WOTC is worth up to $9,600 per eligible employee. To claim the credit, businesses must complete a certification process with their state workforce agency.
The Tax Cuts and Jobs Act made several changes to the WOTC, including expanding the eligibility criteria to include long-term unemployed individuals.
The Tax Cuts and Jobs Act made several changes to the tax code that will impact businesses of all sizes. Some of these changes are temporary, while others are permanent.
Businesses should be aware of how these changes will affect them so they can make the appropriate adjustments.
If you want to file your business taxes correctly, consider hiring a reputable accounting firm. One of the trusted accounting firms that specialize in filing small business taxes in Florida is Swiftbooks, LLC. Call 786-204-2881 to get a consultation with a professional accountant.