Taxes are always a challenge and can be a bit overwhelming this time of year as filing deadlines approach in the next few months. Even the savviest and most nimble business owners may have a hard time keeping track of all the changes happening to the tax code for 2022 and 2023.
Below are some questions you can ask yourself as you begin to seek out some tax relief options for 2022 and planning strategies for 2023.
Did you start a 401(k) program for your employees or are you considering doing so in 2023?
A tax credit can help reduce the financial burden of the initial costs of a retirement plan. The credit offers up to the larger of $5,000 or 50% of your administrative and educational costs related to starting a retirement plan. The credit also offers an additional $500 for up to three years if you have an auto-enrollment option.
An added benefit to offering a 401(k) program is that any employer contribution is tax deductible. Employer matches reduce the organization’s taxable income and create employee retention thus reducing long-term payroll and training costs.
As with any credit, certain stipulations will apply. For instance, there must be 100 or fewer employees in the organization and at least one non-highly compensated employee that participates in the plan.
Have you purchased or are you considering buying an electric vehicle this year or next?
It is no secret gas prices have been fluctuating in the last year and as a result, many are turning to electric vehicles. If this is something you are considering, know there are tax benefits provided for this purchase.
Two and four-wheel all-electric vehicles are eligible for a tax credit worth up to $7,500 for small commercial or passenger vehicles. This credit has been available for several years, but the Inflation Reduction Act has renewed and enhanced this credit for another ten years.
The tax credit was also expanded making small businesses eligible for a larger credit depending on the type of vehicle purchased. For example, up to $40,000 is available for electric vehicles weighing more than 14,000 pounds. If you have considered adding vans or trucks to your fleet this may be a great time to invest.
This revision will take effect on January 1, 2023, so this could be an advantageous tax planning strategy for next year.
Certain restrictions apply to both 2022 and 2023 so be certain to discuss this with a tax advisor. Fortunately, the restrictions on the small business tax credit are less stringent than the personal tax credit but it’s still worth a discussion.
Do you currently have health insurance for your employees?
If so, a tax credit could provide relief for those premium costs. Insurance options eligible can be considered under the Small Business Health Options Program and in some cases acquired through brokers or agents depending on the company’s location.
Keep in mind that this credit will reduce any deductions taken for any employer-paid contributions. The deductions will help reduce your taxable income but qualifying for this credit will reduce your tax liability dollar for dollar. If you did not owe taxes, the credit can be rolled back or forwarded to a different taxable year.
Caveats to consider for this tax credit are that the business must contribute at least 50% to the employee’s premiums and have fewer than twenty-five full-time employees. The average salary must be less than $56,000 and the insurance plan must be offered to all full-time employees.
The health coverage must also be purchased through the SHOP program previously mentioned and the credit is only eligible for two consecutive years.
Have you conducted any research and development this year?
Fortunately, for IRS purposes, research and development credits are not only for companies performing groundbreaking cancer research or designing rockets to Mars. For small businesses, R&D credits can be claimed for any developments or improvements to a current product or the creation of a new one. They also cover process improvements, refining techniques, and developing new formulas.
This credit is very similar to the health insurance credit in that it would reduce any deductions taken for taxable income. These savings could be quite beneficial to any business.
The Inflation Reduction Act has increased the availability of this credit from $250,000 to $500,000 starting in 2023. Wages, including employer payroll taxes, supplies related to the research, as well as any costs for contract or outsourced services are eligible expenses for this credit.
These are just a few tax relief options for your 2022 and 2023 taxes. Depending on your industry, there may be many more credits and tax-saving opportunities available. Speaking with your accountant or tax professional this time of year, even before the chills of January set in, may save you a lot of money and headaches in the new year.