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Tax Credits, Deductions, & Opportunities for Business - 2022 Edition
Updated: Nov 28, 2022
As we are near the half-way point of 2022, here are some tax credits, deductions, and other opportunities to help make your business even better!
Mid-Year Mileage Rate Increase
The IRS has issued Announcement 2022-13 to make the new mileage rates official, and they included the legalese for the latest rates. Here are the main points:
The standard mileage rate for business travel will be 62.5 cents per mile
The new rates take effect on July 1, 2022
Other rates for volunteer and medical mileage were also updated and clarified
Employers will want to watch mileage reimbursement claims as the rate for January to June will be 58.5 cents, while July to December will be the new 62.5 cents.
Sources: Announcement 2022-13; IRS News Release
Business Meal Deduction Remains 100%
For 2021 and 2022 only, businesses can deduct the total cost of business-related food and beverages purchased from a restaurant. Otherwise, the limit is usually 50% of the cost of the meal.
To qualify for the higher limit:
the business owner or an employee of the business must be present when food or beverages are provided
the expense cannot be lavish or extravagant
the restaurant must be a business that prepares and sells food or beverages to retail customers for immediate on-premises or off-premises consumption
the use of grocery stores, convenience stores, and other businesses that primarily sell pre-packaged goods not for immediate consumption do not qualify
the ability for an employer to treat certain employer-operated eating facilities as restaurants is not allowed, even if they are operated under contract by a third party
So remember, for tax year 2022, you can claim 100% of your qualifying meal deductions. Remember that the deduction reverts to 50% on January 1, 2023.
Source: IRS-2022-100
Home Office Deduction Popularity
With America's workforce continuing to shift to being more home-based, many business owners are curious about the ability to deduct a home office. While the IRS provides two calculation methods, it is essential to know if your home office is a qualifying home office.
For your home office to qualify, you need to be able to answer yes to at least one of these questions:
exclusively and regularly used as your principal place of business
exclusively and regularly used as a place where you meet or deal with patients, clients, or customers in the ordinary course of your trade or business
in the case of a separate structure that is not attached to your home, the independent structure much be used in connection with your trade or business
use the dedicated space regularly for storage and certain non-operating use
The other factor you must remember is if your use of a home office is allowed for the type of business you operate. Sole proprietors, single-member LLCs, and a few other business tax types can deduct a home office based on the business's gross income limits. However, those in a partnership, an S-corporation shareholder, or a corporation may be more limited or even disallowed some of the home office deduction.
For more detailed information, Publication 587, Business Use of Your Home, has more details on the home office deduction and how to figure it out. Or, you can always give us a call.
Source: IRS-2022-100
Did I Pay for a Repair or an Improvement?
Generally, a current business deduction is allowed for the cost of repairs and maintenance incurred during the year. On the other hand, the amounts paid to acquire, produce, or improve tangible property must be capitalized. Since repairs and improvements often have very similar characteristics, it can be tricky to classify the expenditures. However, correct classification is important because the cost of repairs can generally be deducted in the year paid, while improvements must be capitalized and the deduction taken over several years through depreciation.
An improvement requiring capitalization occurs with an addition to or partial replacement of property that results in a betterment of the unit of property, restores the unit of property, or adapts the unit of property to a new use. The cost of an improvement must be capitalized and depreciated over a certain number of years as if the improvement were separate property.
Example: Nina has a truck she uses for her contracting business. Her vehicle was damaged, and the cost to repair it is considered a deductible repair cost. Routine maintenance on the truck, such as engine tune-ups and oil changes, are also currently deductible expenses. Nina added a hydraulic lift to her vehicle, which improved its functionality. The cost of adding the lift is an improvement that must be capitalized and depreciated over the truck’s remaining useful life.
Example: Glen owns a rental house, and the roof on the unit is leaking. Glen is comparing the costs and benefits of fixing the leaking roof with replacing the entire roof. Glen can deduct the cost of repairing the leak as a rental repair expense. However, if Glen completely replaces the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Glen must capitalize and depreciate the cost of a new roof.
Business Use Requirement
Repairs are nondeductible personal expenses, while an improvement increases the home's basis and reduces any potential gain on the home's sale. Repairs are deductible only on business-use or rental property. A homeowner with no business use of the home does not benefit when an expenditure is classified as a repair rather than an improvement.
Example: Olive repaired a hole in the wall in her living room, replaced a few broken tiles in her bathroom, and sealed some cracks in her windows. She spent $1,200 making repairs to her home. Because Olive does not use her home for business purposes, the $1,200 is a personal expense and is not deductible.
Recordkeeping Requirements
Keep good records and ask contractors to provide an itemized list showing repairs and separately stated improvements and costs. If repairs and improvements are completed simultaneously, the IRS may classify the entire cost as improvement, even if some of the expenses were for repairs.
Court Case: A taxpayer incurred expenses to add a lunch area, restrooms, and a loading and unloading ramp to his existing manufacturing plants. In addition, the interior of the plants was painted and 'fixed-up.' He claimed a repairs and maintenance deduction for all of the expenses. The IRS disallowed the deduction, explaining that the additions/improvements were made under a proposal and were required to be capitalized. The court agreed with the IRS, noting that the additions of the lunch room, restrooms, and ramps constitute nondeductible capital expenditures that were more than merely keeping the property in an ordinarily efficient operating condition. The additions and improvements not only increased the value of the plants but also aided in adapting them to a different use. The painting of the facility would qualify as a deductible repair if those expenses were standing alone; however, when made as part of an entire capital investment in the improved property, as they were in this case, they must be treated as a capital expenditure. In addition, the court noted that it was impossible to determine from the evidence submitted what portion, if any, was attributable to deductible repairs. The deduction cannot be allowed without segregation of expenses, and all expenditures must be capitalized. (Rutter, T.C. Memo 1986-407)
Legal Disclaimer: This section contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. Certain content on this section is copyright © 2022 Tax Materials, Inc. All Rights Reserved for applicable content. Used with permission.
Helping Employees Understand Their Withholding
Have you ever heard this from an employee: "I got back a huge tax refund this year. Time for a vacation!" Or what about: "I owed so much money this year. I don't think my paycheck is being calculated right."
As a small employer, it is tough to have employees constantly asking if their paycheck is being calculated correctly. Many employees don't understand that the information they provided you on their Form W-4 may cause issues. Fortunately, summer is here to save the day!
The typical summer months are a great time to encourage employees to review their wage withholding and complete a new W-4. For employees who don't have a trusted tax pro, you can refer them to the IRS' Tax Withholding Estimator. This easy-to-use online tool will walk any employee through the different types of income that could impact their yearly tax filing. At the end of the quick process, the system will tell them what the IRS thinks their withholding should be and give them a printable Form W-4 already completed.
Remember always to get Form W-4 from IRS.gov so you know you're providing your employees with the correct form for the year. You should also check with your state tax agency; many have a withholding form to help employees have the best state wage withholding possible. Since we're in Oklahoma, here is the Form OK-W-4 from the Oklahoma Tax Commission.
Management Tip: Use a Budget
While a normal budget process might look at the first nine to ten months of a year to help a business owner plan for the next year, it is never too late to start using a budget.
Budgets help you take known data or planned goals and compare those projections with the actual day-to-day data of your business. From helping you keep income spread evenly over the year to reducing costs in operations, budgets are an excellent tool for any business owner.
And don't think a budget is a super complicated tool to create. Asking your accountant or tax pro to help is a great start. You can start as detailed or as simple as you like.
Remember, a budget is only as good as the time you take to review it each month or quarter.
Legal Disclaimer: This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. This information was current at time of posting; we are not responsible for updating this or any blog post/article for subsequent changes in the law or its interpretation.