IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2022 prepayments cannot go into 2024. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Accrual basis taxpayers must record expenses as “accrued”, so you cannot prepay expenses but you can place vendor orders and purchases on credit and pay for those items in 2023 but deduct in 2022.
Home Office Deduction
If you are using a home office in your business you may be entitled to write-off part of maintaining your home. You should keep evidence regarding the size of the office and the home, as well as what you use it for.
If you’re an S Corporation, it’s harder to meet these circumstances but it is still possible if it’s structured the right way, and in advance.
Taking Mileage
The IRS allows a standard mileage deduction at .585 for the first part of 2022 and .625 for the second part of 2022. It may not seem like a lot but it adds up!
And if you qualify for the home office deduction, you’ve just increased your mileage deduction because your business trips can start and end at your home office.
Entity Selection
Should I be a sole proprietor, S Corporation, or C Corporation? Each type of entity is taxed differently. And each has its own advantages and disadvantages.
Also, keep in mind, your entity selection does not need to be forever. There may be a better way to be taxed based on your individual needs and goals. Tax savings from entity selection should be looked at regularly.
Hire Your Children
No really, hire your kids to work in your business.
If you’re a sole proprietor you will save tremendously on this because you don’t have to pay FICA taxes or income taxes on the wages. If the wages are less than $12,950 (the standard deduction) then you have shifted income from a high tax bracket to a 0% bracket.
You can do the same as an S Corporation but you will have to pay the FICA taxes. You still will have the tax savings on income shifting, which adds up.
Look Into ROTH IRA Conversions
Getting money into a ROTH IRA can be hard if you’ve been in the top tax brackets the last couple of years.
If 2022 has been a bad year and you know your tax bracket is low, or even negative, now is the time to think about converting your Traditional IRA into a ROTH.
That conversion would be taxable, but any earnings after the conversion are tax-free. And hoping we don’t see any more pandemics or national disasters, you may not have another low tax year to apply this strategy.
Sell Your Principal Residence
This is truly a tax loophole.
If you have lived in your principal residence for 2 of the last 5 years you can sell your home and pay $0 income taxes if the gain is under $500,000 (if married and $250,000 if you’re not).
You can do this every 2 years!
Max Out Retirement Contributions
If you’ve got the cash, max out your retirement contributions for the most tax savings. Once a year closes you can’t go back, so if you snooze you lose.
Max Out HSA Contributions
If you have a high-deductible health insurance plan you should be maxing out your HSA (health savings account) each year.
This allows you a tax deduction, a way to save for medical expenses, and a future retirement account if not used. Win win!
Several of these tax deductions may require documentation or further research into your specific tax situation. If you are interested in implementing any of these items please set up a Tax Planning Consult with us so we can make sure you are in compliance.
If you have additional questions, feel free to give us a call or shoot us an email.