- Tax obligations can be confusing and change frequently, so it’s important to take time to review the latest tax laws and codes.
- Major tax legislation in 2018, and the COVID-19 legislation that followed, resulted in many changes for small businesses, some of which are still in effect while other policies are expiring.
- You should work with a certified public accountant (CPA) to ensure you are complying with current regulations and paying the right amount.
- This article is for small business owners who want to know what to expect for their tax obligations this year.
As a small business owner, it’s important to stay up to date on tax laws so you pay the right amount each year. There are several changes to the federal tax code that will impact small businesses in 2022 for the 2021 tax year. Read this guide to find out the most important things to know about filing taxes this year. [Doing your taxes on your own? See our reviews of the best tax software for small businesses.]
Tax changes for 2022
The following changes are in effect for 2022, so be aware of what they mean for your small business when filing.
Deferred Social Security taxes
For the 2020 tax year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to defer deposits of their portion of Social Security taxes that were due between March 27, 2020, and Dec. 31, 2020. However, in 2021, half of these deferred taxes became due by Dec. 31, 2021, with the remainder due Dec. 31, 2022. If you didn’t pay the first half on time, the IRS will consider all of the deferral invalid and will assess penalties on all of the deferred taxes using the original due date.
Employee retention tax credit
The Infrastructure Investment and Jobs Act canceled the 2021 fourth-quarter employee retention tax credit. If you have not claimed this credit for Q4, you will not be able to do so. If you already claimed it (the bill passed on Nov. 15, 2021), you may be penalized unless you deposited the taxes on or before Dec. 20, 2021, or by Jan. 31, 2022, with Form 941.
Net operating rules
If your business had a net operating loss in 2018, 2019 or 2020 that is being carried forward into 2021, it will be limited to 80% of taxable income. For example, if a business had taxable income of $50,000 in 2021 and a loss of $55,000 for 2020, the maximum carryover would be $50,000 times 80%, which would be $40,000, rather than the full $55,000. This would result in a cash payment need and may also affect state income tax calculations.
Excess business-loss limitation rules
Through a temporary suspension of Tax Cuts and Jobs Act rules, in 2019 and 2020, businesses could carry net operating losses back five years or carry them forward indefinitely. However, those rules are now back in place for the 2021 tax year. That means taxpayers cannot deduct losses of more than $524,000 if married and filing jointly or $262,000 if single. This applies to all business income and losses, including Schedule C and pass-through entity income and losses.
In addition, W-2 wages can no longer be used to offset the business losses. Spousal income is taxed separately and may result in a tax bill even if the business losses are greater than the spousal income.
Interest expense limitation rule
The interest expense limitation rule is another tax rule that was temporarily suspended to help Americans during the pandemic, but it is back in force for the 2021 tax year. This rule limits taxable income to the current tax year and reduces the interest expense deduction from 50% to 30% of adjusted taxable income.
Unlike some of the other changes, the charitable contribution rule is a positive for taxpayers for the 2021 tax year. A C corporation can deduct donations up to 25% rather than the previous 10% of its taxable income (to do so, the business must elect the Increased Corporate Limit on a contribution-by-contribution basis).
Businesses donating food inventory can qualify for deductions of 25%, up from 15%. This is applied to taxable income for C corporations. For S corporations, sole proprietorships and partnerships, it’s based on aggregate net income from all trades or businesses from which the contributions are made.
Families First Coronavirus Response Act
The Families First Coronavirus Response Act (FFCRA) required certain businesses to provide paid sick and family leave to employees who were affected by COVID-19 through March 31, 2021. Businesses that made these payments are eligible for tax credits for 100% of the cost of sick-leave pay, family-leave pay, qualified healthcare plan expenses and the employer’s share of FICA payroll taxes for sick-leave expenses they incurred under the FFCRA. If you qualify, remember to claim this tax credit for the first quarter of 2021.
Tip: Work with a tax professional to make sure you’re calculating your business taxes correctly and in accordance with the latest rules.
Types of small business taxes
Small business taxes vary based on the structure of the business, but here are the five primary small business taxes.
- Income tax: Except for partnerships, all businesses file annual income tax returns. Partnerships, however, file information returns.
- Self-employment tax: This tax is on your net earnings from self-employment and goes toward your Social Security and Medicare obligations.
- Employment taxes: If you have employees, you have taxes (and forms) related to their Social Security and Medicare taxes, federal income tax withholdings, and federal unemployment tax. Payroll taxes fall into this category.
- Excise tax: There are several types of taxes that fall into the excise tax category. This affects your business if you make or sell certain types of products; operate a certain business type; use specific equipment, facilities or products; or are paid for qualifying types of services. If that sounds vague, it’s because it cuts across many categories. The classic examples of products that carry an excise tax are fuel, tobacco and alcohol.
- Estimated taxes: Many businesses (sole proprietors, partnerships and S corporation shareholders) must pay quarterly estimated tax payments. This requirement applies if you don’t have taxes withheld from each paycheck or don’t have a sufficient amount withheld from each paycheck.
Key takeaway: Small businesses may need to account for several types of taxes, including income tax, self-employment tax, employment taxes, and excise tax. These will vary based on your company’s structure.
Things to remember
If you started your business in 2021, as millions of Americans did, you may not be familiar with all of the ins and outs of filing a business tax return. Here are some key things to remember.
- To file your tax return, you will need your tax ID number. This is typically either the employer identification number issued when the articles of incorporation are approved for corporations and LLCs or a Social Security number, although in rare cases other numbers can be used.
- In addition to income taxes, you will owe 15.3% in self-employment tax on your net self-employment income. This covers what an employer would normally deduct from your paycheck for Medicare and Social Security taxes.
- All income, including cash payments, needs to be reported on your tax return.
- If you pay your own health insurance premiums, in some cases you can deduct that as a business expense.
- If you’re not ready to submit your taxes by April 15, you can file for an extension. However, you should pay your estimated taxes if you don’t want to get charged penalties and interest. The deadline for requesting extensions is March 15 for S corporations and April 15 for C corporations.
- Employee bonuses are taxed differently from regular wages, with a special bonus tax of 22% as well as a distinct rate for Social Security and Medicare taxes.
- If you have a regular job and a side hustle that supplements your income, the IRS considers you to have self-employment income, and you are taxed accordingly.
Tip: Business travel is 100% deductible, but personal travel isn’t deductible at all. So if you have airline or hotel points, use them for your personal travel, and pay cash for your business travel expenses.
Previous tax changes
There were also some other minor changes that stemmed from the 2018 tax reform law that you should keep in mind. As you work with your accountant or tax professional, it’s important to understand all of the regulations that were implemented. The noteworthy changes include deductions for pass-throughs, first-year bonus depreciation and net operating-loss changes.
Anthony Parent, founding partner of Parent & Parent LLP, said that many small businesses may be in for a rude awakening if they have significant operations abroad. “There are a lot of small and medium businesses that have some sort of international component. We’re trying to get ahead of it and warn people.”
International taxation and regulation are very complicated, so it’s important to work directly with a professional to ensure you’re being taxed at the correct rate.
State and local tax (SALT) cap
As of 2020, filers can only deduct up to $10,000 in state and local property and income taxes. Many business owners who operate a pass-through entity in a high-tax state can take advantage of SALT deductions. Wayne Winegarden, senior fellow at the Pacific Research Institute, said that all business owners should be aware of this cap. “I really think in the high-tax states, the SALT cap is going to be meaningful, more for small businesses, just because they’re going to be filing through their personal taxes,” he said.
Deduction for pass-throughs and corporations
With the tax reform law, there was a significant deduction for both pass-through and corporate entities. Pass-through businesses are small businesses structured as S corporations, limited liability companies, sole proprietorships and partnerships. Pass-throughs make up approximately 95% of U.S. businesses. The law now provides a 20% deduction for those businesses. The only limitation is for owners of some service-based businesses, like law and accounting firm owners who make more than $315,000 (if the owner is married and filing jointly) or $157,500 (if the owner is a single filer) per year.
C corporations also got a big deduction: The law lowered the tax rate from 35% to 21%. This slashed rate aims to bring major corporations back to the U.S. to employ workers and create wealth.
First-year bonus depreciation
The first-year bonus depreciation deduction was changed to 100%. In other words, businesses that made eligible equipment and property purchases could deduct the full purchase price instead of writing off a portion of it each year. This provided businesses with more money upfront, which lawmakers hoped would be invested back into the business or used to hire workers.
Josh Zimmelman, founder of Westwood Tax & Consulting, said that this enables businesses to write off the cost of assets in one shot. “A company can invest in vehicles, computers, and equipment, and claim the entire expense on their … tax return.”
Winegarden said the break is an incentive for businesses to spend more. “Anything that gets you closer to complete expensing is going to increase the value of the depreciation, lower the tax burden and reward those capital-intensive firms,” he said.
Key takeaway: Following the 2018 tax reform, there were some minor changes that may still be relevant to your company today.
Important 2022 deadlines
Be aware of the following tax deadlines for 2022:
- 2021 tax returns and payments are due by midnight on April 18, 2022, for sole proprietorships, household employers and C corporations. For S corporations and partnerships, taxes are due March 15, 2022.
- Quarterly tax deadlines for 2022 for estimated income tax are April 18 for Q1, June 15 for Q2, Sept. 15 for Q3 and Jan. 15, 2023, for Q4.
Common small business tax problems
- If you have a tax liability of at least $1,000, you should send quarterly tax payments to the IRS. If you don’t, you might be subject to interest and penalties.
- If you claim too many deductions on your business tax return, you could trigger an audit by the IRS, so it’s important to keep accurate and detailed records.
- One red flag for the IRS is estimating amounts for income and deduction rather than using the actual numbers. If numbers look too round, such as $5,000 instead of $5,128, this can flag you for an audit.
- Leaving all the calculating and filing for just before taxes are due can not only create more stress, but also result in missing out on deductions. Keep track of income and expenses year-round with the best accounting software.
- You could be paying more than you should if you work from home and fail to write off a portion of your home expenses. This is done by taking the square footage of your home office ($5 per square foot) or by totaling actual home maintenance expenses and multiplying by the percentage of your home used exclusively for business.
- If you report a loss year after year, the IRS could decide your business activities are a hobby and disallow the deductions altogether.
- Some commonly missed business deductions are education and training expenses (related to the business only); depreciation on furniture, equipment and other assets; mileage, if you drive for work (not including commuting to work); and business-related tax payments like payroll tax and state income tax. Make sure you go through all of the allowed deductions and claim the ones you meet the requirements for.
- Avoid taking tax deductions for illegal activities and claiming crazy tax deductions, such as massages to relieve work-induced stress and every restaurant meal you eat, whether personal or for business.
Small business tax tips
If you’ve purchased a business this year or are new to small business tax structures, there are a few things to keep in mind. Here are five key tips:
- Think about taxes all year long. Small business owners should not treat income taxes as an annual event. Rather, tax planning should be a year-round activity. Waiting until the last minute makes tax preparation more complicated and limits your money-saving options.
- Be aware of changes to tax laws. Even with the help of a skilled professional, a small business owner must keep up with changes. This ensures your tax professional is doing the best possible job and keeps you informed as a business owner.
- Don’t make assumptions. Never make business decisions assuming particular tax breaks will pass or that certain policies will be enacted.
- Choose the right state to incorporate in. You don’t need to incorporate your business in the same state in which you run your company. If you’re just starting out, here are some of the best states for small business taxes.
- You don’t actually want a tax refund. It’s possible to get a tax refund as a small business, but in most cases, it isn’t to your benefit. Typically, a refund means you overestimated the amount of taxes you paid, which could have been reinvested into your business.
Top small business tax deductions
This isn’t a comprehensive list of tax deductions available to small businesses (and you need to ensure your business is eligible for these deductions), but it’s a great starting point before working with a CPA, who can ensure you get all of your relevant deductions.
- Rent: If you rent your office space or retail location, the cost of your rent is fully deductible.
- Home office: If you have a dedicated workspace in your home (it must be regularly and solely used for business), then you are eligible to deduct expenses related to that portion of your home. The simple option is to take $5 per square foot up to 300 square feet, but you can break it down as a percentage of the total square footage of your home and itemize your costs related to the space.
- Advertising: Promoting your company not only helps grow your business, but it also may shrink your taxes, as these expenses are fully deductible as well. This includes things such as business cards, fliers and digital marketing.
- Vehicle: As long as you can document and verify that the vehicle is used for business purposes, you can deduct the operation costs. As with the home office deduction, you can choose to use the simple deduction, which is 56 cents per mile for 2021, or you can itemize specific costs.
- Utilities: The basics of keeping your business running are fully deductible as well. You can deduct the costs of utilities like electricity, water, heat, internet service and phone lines.
- Travel: Business travel costs are fully deductible. These include flights, hotels and other transportation costs you incur while on a business trip.
- Employee salaries: Paying your employees pays off. Their salaries – along with many benefits, like retirement and education offerings – are tax-deductible. [Learn how to build a great employee benefits plan.]
Small business tax resources
Here are some additional resources for learning about taxes:
- The Small Business Administration (SBA) maintains a guide on navigating the tax code and staying up to date on your tax responsibilities as a business owner.
- The IRS website has information about how the Affordable Care Act affects small business owners’ taxes, although the policies are subject to change.
- If you can choose which state your business will operate in, then you may want to consider the small business tax rates by state. Additional information and recommendations are available at the Tax Foundation.
- The SBA has a helpful guide on choosing the right business structure if you’re just starting your business this year.
- The IRS website has additional details on the Small Business Health Care Tax Credit, which provides a tax credit to small businesses that offer healthcare coverage to their employees. You can learn if you’re eligible and how to calculate and claim your credit.
- The IRS maintains an information center on self-employed and small business taxes.
Best states for small business taxes in 2022
If you haven’t yet started your business or are thinking of moving, considering the tax environment before moving can influence where you choose to reside and incorporate your business. Here are the best states for small business taxes:
- South Dakota
- New Hampshire
Change to be aware of for 2023
According to the American Rescue Plan Act of 2021, beginning in 2022, small business owners and freelancers who receive more than $600 from third-party digital platforms will need to include that amount in their income. Platforms such as Amazon, Etsy, and eBay will now be issuing a Form 1099-K with this income. Keep this in mind as you collect your 2022 tax materials for filing in 2023.
Sean Riley, Sean Peek and Matt D’Angelo contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.