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The coming year's tax season will be challenging, so start planning and preparing now. — Getty Images/kate_sept2004

As 2021 draws to a close, small business owners can take steps to reduce this year’s tax bill. Likewise, it’s also an excellent time to assess multi-year tax strategies. Tax planning gets your files ready for tax season and helps you make last-minute decisions based on assumptions about next year’s tax burden.

Although 2021 wasn’t as tumultuous as 2020, some elements of the Tax Cuts and Jobs Act (TCJA) are scheduled to expire. On the other hand, proposed tax changes may affect your 2022 tax situation. Here are steps you can take to make tax time less stressful in the coming months.

2021 tax year: last chance for deductions and credits

Several deductions and credits expire in 2021. Take advantage of these now and consider how their elimination could affect your income and corporate tax rate in 2022. Pay attention to the latest IRS guidance in each case, as it may change before you file your taxes.

Credits and deductions that expire in 2021 include:

  • Employee Retention Tax Credit (ERTC): Companies can get a maximum of $21,000 for keeping workers employed through September 30, 2021. However, if you started your business after February 15, 2020, it’s considered a recovery startup business, and the maximum credit is $50,000. Learn more by reviewing IRS Notice 2021-49.
  • Tax credits for paid leave: If you paid qualified sick or family leave related to COVID-19 or vaccinations through September 30, 2021, you may be eligible for a credit due to the Families First Coronavirus Response Act (FFCRA) and American Rescue Plan (ARP). Review the IRS comparison chart to see how rules for time frames in 2021 differ.
  • Research and development costs: According to Section 174, research and experimental (R&E) expenditures can be deducted in the tax year they were incurred. However, this part of the TCJA expires after December 31, 2021. The proposed Build Back Better Act could delay capitalization and amortization requirements. Still, you may want to take advantage of the R&E deduction for the 2021 tax year.
  • Business interest expenses: You can deduct business interest expenses paid or accrued in the taxable year, not to exceed the sum of your business interest income for the year, 30% of your adjusted taxable income (ATI) for the year, and your taxpayer’s floor plan financing interest expense for the year. Certain small businesses that are not a tax shelter and have average annual gross receipts of $25 million or less in the previous three years are exempt from this limit, known as the Section 163(j) limitation.
  • Paycheck Protection Program (PPP) loans: Currently, you can deduct expenses paid for with PPP loans. Guidance may change before tax filing time, so it’s vital to diligently track payroll and fees paid with PPP funds or other government grants or loans.
  • Charitable contributions: Individuals can claim up to $300 in charitable donations (or $600 as a married couple filing jointly) even if they don’t itemize deductions. If you itemize, you can deduct cash donations to qualifying charitable organizations that are up to 100% of your adjusted gross income (AGI). C corporations can claim deductions worth up to 25% of taxable income for cash contributions.
  • Food inventory donations: In 2021, the deduction limits for donating food inventory increased from 15% to 25% of a company’s taxable income. Check out the U.S. Department of Agriculture for more information about federal incentives for food donations.

[Read more: 10 Commonly Overlooked Small Business Tax Credits]

2022 will be the last year you can take the total deductions for Section 179, bonus depreciation, and qualifying business meals.

2022 tax year: Leverage these deductions before they expire

2022 will be the last year you can take the total deductions for Section 179, bonus depreciation, and qualifying business meals. Although this could change, it’s a good idea to take advantage of these deductions before the January 1, 2023 deadline to acquire and place assets into service.

Like 2020, you can purchase certain fixed assets and take the entire Section 179 depreciation deduction in 2021, referred to as first-year expensing. 2022 is the last year businesses can deduct 100% of qualified expenses. In 2023, this figure is reduced to 80%, as the 100% allowance generally decreases by 20% per year in taxable years after 2022 until Jan. 1, 2027.

For 2021, the maximum expense deduction is $1,050,000. This limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $2,620,000. The maximum deduction for sport utility vehicles (SUV) purchased for business use in 2021 is $26,200.

Although the TCJA offers deductions for 50% of qualifying client-related business meals, the Consolidated Appropriations Act (CAA) made an exception for 2021 and 2022. You can temporarily deduct 100% of eligible business meals eaten at a restaurant or provided by a restaurant.

[Read more: 5 Smart Small Business Tax Strategies That Will Save You Money]

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Published December 01, 2021