A new year typically brings new or updated tax laws that can have a big impact on your business. Even if you’re knee-deep in preparing for your 2021 tax year filing, it’s not too soon to start thinking about the changes that could affect your business for the 2022 tax year.
Here, we review five new or updated tax laws that might impact your company in 2022 and provide a few helpful reminders about filing your 2021 tax return.
R&D Expense Amortization
Many companies engage in research and development (R&D) activities to advance their products and services, especially in the biotechnology, pharmaceutical, software, engineering, and manufacturing industries. In the past, you’ve been able to deduct any qualified research expenditures in the year you incurred those costs, enjoying a lucrative tax deduction. That all changed on January 1, 2022.
Now, under the Tax Cuts and Jobs Act of 2017, your business can no longer fully deduct R&D expenses in the year you incur them. Instead, you must amortize those expenses—over five years for R&D activities conducted in the US or over 15 years for R&D work done outside the US.
If your company engages in R&D activities, this tax law change will reduce the dollar-for-dollar tax benefit of your R&D costs, increasing your tax liability and potentially impacting your cash flow and liquidity. Rather than wait to absorb this impact at year-end, it’s prudent to talk with a tax specialist now so you can make the most informed decisions about your current year R&D projects and planned expenditures.
Meals & Entertainment Deductibility
The deductibility of business meals and entertainment changed under the Consolidated Appropriations Act signed in late 2020, and this is the last year those changes are in effect. Specifically, business entertainment costs are no longer deductible, and the deduction percentage for meals varies depending on where the food is purchased.
For bona fide business meals purchased from a restaurant, both food and beverages are 100 percent deductible for the 2022 tax year. For example, if you take a client out to lunch while meeting to discuss business, or one of your employees travels to a conference and eats dinner out at a restaurant, your company can deduct 100 percent of the cost for food and beverages. On the other hand, if you stock your office with coffee and snacks for your employees then you can only deduct 50 percent of the cost.
To ensure your company complies with the rules around meal deductibility for 2022, be sure to maintain accurate records and receipts for any meals that qualify as business meals.
Digital Payment Reporting
The digital payment landscape is exploding, with global digital payments made in 2020 estimated at $5.44 trillion. If your business accepts payment for goods or services through apps like Venmo or CashApp, you need to be aware of new IRS reporting requirements that took effect for the 2022 tax year under the American Rescue Plan.
Starting January 1, 2022, if you receive payments of $600 or more per year for your products or services through a third-party payment network, the provider will be required to report your total payments to the IRS on Form 1099-K. Before, the IRS only required those networks to report on your payments if you exceeded the thresholds of $20,000 in payments and 200 total transactions in a single year.
Only business transactions—defined as payment received for goods and services—will be reported. But since some people use digital apps to accept personal payments (to share the cost of a dinner with friends or pay their share of rent, for example), it’s best to set up a separate payment account for your business and only use it for business transactions.
If you create a business payment account, be sure to provide a valid Social Security number or Employer Identification Number (EIN). While it’s anticipated that digital payment networks will have the ability to classify and tag transactions—reducing the odds that a 1099-K will include personal transactions or other non-taxable income—it’s best to work with tax professionals like the experts at Scrubbed to ensure the most accurate recordkeeping and reporting.
Payroll Taxes Deferred Under the CARES Act
If you’re like many business owners, you may have taken advantage of the opportunity to defer payment of certain payroll taxes under the Coronavirus Aid, Relief and Economic Security (CARES) Act. If so, it’s important that you pay those deferred taxes by the 2022 deadlines.
The CARES Act allowed employers to defer payment and deposit of their share of employees’ Social Security taxes on wages paid between March 27, 2020 and December 31, 2020. If you chose to defer those payments, you’re now required to pay them. The first half of the deferred amount was due by December 31, 2021 (which the IRS then amended to January 3, 2022) and the second half is due by December 31, 2022.
If you don’t pay your deferred taxes on time or if you pay less than the amount due, you’ll be hit with a 10 percent penalty on the entire amount you deferred. For example, if you owe $100,000 in deferred taxes and you make the first payment of $50,000 on time but you’re late with the second payment of $50,000, you’ll pay a 10 percent penalty on the entire $100,000.
Taking the Qualified Business Deduction in Short Tax Years
Since the 2018 tax year certain types of pass-through businesses, including some S corporations and partnerships, have been eligible for the Qualified Business Deduction (QBD), also called the 199A deduction. This deduction is equal to 20 percent of qualified business income, subject to certain limitations and income thresholds.
In the past, if your business had a short taxable year that spanned more than one calendar year, the deduction wasn’t as beneficial. Let’s say you started a new enterprise on September 1 and established your tax year as ending on June 30. In that case, the IRS only allowed you to include wages paid between September 1 and December 31 when calculating the qualified business income that was eligible for the deduction in your first tax year.
The IRS recently issued revised guidance on how to determine wages eligible for the deduction in a short taxable year. Now, businesses that qualify for the QBD can include all wages paid during a short taxable year, even if some of those wages were paid in the next calendar year.
When Filing Your 2021 Return…
The IRS is encouraging business and personal taxpayers to take certain steps to streamline the 2021 tax return filing process due to the massive backlog the agency was working through before the new tax year even began.
- File your tax return electronically and choose direct deposit for your refund (if you’re receiving one) to avoid processing and payment delays.
- Make sure all your documentation and statements are correct before completing your return, including W-2s and 1099s.
- If you need to communicate with the IRS, it’s best to use electronic vehicles like email or the agency’s online or digital apps, since many taxpayers are reporting significant delays in trying to reach the IRS by phone.
Need help navigating the complexities of the ever-changing tax laws and requirements that affect your business? Turn to the tax, accounting, and finance experts at Scrubbed!
Scrubbed provides hundreds of businesses like yours with tax advisory and consulting services—helping you stay compliant, optimize the tax credits and deductions you’re eligible for, and reduce your tax liability. We also offer comprehensive accounting and finance services that enable you to keep your FTE count low and spend more time focusing on your business.
Book a call with a Scrubbed professional and find out how our outsourced tax, accounting, and finance services can help your business thrive.