Your small- or medium-sized business may be eligible for certain tax breaks that aren’t available to other large businesses. Here are some examples.
The “qualified business income” (QBI) deduction allows eligible individuals, trusts, and estates to deduct up to 20% of
- QBI earned from (a) a sole proprietorship or (b) a single-member limited liability company (LLC) that’s treated as a sole proprietorship for federal income tax purposes, and
- QBI passed through from a pass-through business entity, meaning (a) a partnership, (b) an LLC classified as a partnership for federal income tax purposes, or (c) an S corporation.
For 2018 through 2025, pass-through business entities report tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction rules are complicated, and the deduction will be phased out at higher income levels. Importantly, however, this unique deduction was added to help small, profitable businesses (including the owners of flow-through entities), as it is not available for large businesses or C corporations and their shareholders.
Cash basis method of accounting
If your business has less than $25 million of average annual gross receipts, then you are eligible to use the cash method of accounting. This gives you the ability to modify your annual taxable income by timing the year in which you recognize taxable income and claim deductions.
Under the cash method, you generally don’t have to recognize taxable income until you receive payment. Also, you can generally write off deductible expenses when you pay for them or make payment with a credit card.
With a gross receipts limit of $25 million, only “small” businesses are potentially eligible for the cash method. Adjusted annually for inflation, the limit for tax years beginning in 2022 is $27 million.
Business Asset Options – Section 179 & Bonus depreciation
For both your new or used property, the Section 179 depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions in the first year they’re placed in service.
For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable than under prior law. Enhancements include:
Higher deduction. The Section 179 deduction has been permanently increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum deduction is $1.08 million.
Loosened phase-out. The threshold at which the maximum Section 179 deduction begins to phase out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.
The phase-out rule kicks in only if your additions of assets that are eligible for the deduction exceed the threshold for that year. If they exceed the threshold, then your maximum deduction is reduced dollar-for-dollar by the excess. Section 179 deductions are also subject to other limitations.
After the Section 179 deduction limitation is met, 100% first-year bonus depreciation is available for qualified assets placed in service in 2022. After 2022, the first-year bonus depreciation percentages are scheduled to decline to 80% for qualified assets placed in service in 2023; the percentage of business assets available for bonus depreciation is further reduced until they reach 0% in the tax year 2028 and later years.
Please reach out to your Wegner tax advisor to determine if you’re taking advantage of all the available business-related tax breaks.