Corporate Tax Changes Proposed – Plan Your Taxes Accordingly

The 2021-2022 financial year fourth quarter is the best time for you as a business owner to be proactive and plan your taxes in order to minimize your 2021 tax liability. Business tax planning should be done more frequently than once a year. Moreover, depending upon the situation, federal and state governments may extend the tax deadline allowing you more time to prepare and file your 2021 taxes by mid or late 2022. However, whether or not, it is always better to have multiple tax strategies on hand, assess them, and execute them so that you need not make last-minute improvements in a hurry.

But for preparing yourself for the upcoming busy tax season, you need to become aware of recent tax amendments or that are expected to be implemented in 2022. This will help you control your tax situation and manage your 2021 taxes in the best manner.

Let’s now discuss some corporate tax changes to make your tax return preparation easier and tax season less hectic.

Corporate Income Tax

In September this year, the Ways and Means Committee had proposed a corporate tax rate of 26.5% (increasing from 20%), which is somewhat less than the 28% suggested by President Joe Biden. The new corporate tax rate is higher than China’s 25 % and average 23.5% tax rate of the developed world. For businesses with income below $400,000, the tax rate would be 18%.

While there have been several changes, the committee also proposed an increase in the minimum tax rate on foreign income of US companies from 10.5% to 16.6%, whereas the president had sought 21%.

The SECURE Act 2.0

The bill proposed also includes a change in the age for the required minimum distribution (RMD), raising it from 72 to 75. The new tax laws would also make it mandatory for employers to have automatic enrollment plans such as 401(k)s and increase the tax credit for small businesses to initiate retirement plans with automatic enrollment.

You should monitor the Secure Act 2.0 because that would possibly become part of a new, larger tax package that might have more provisions hidden along with several changes. The best thing you can do for now is to review your company’s current retirement plan in case you have one, or you may consider whether you should opt for a retirement plan now or wait for the new rules to be enacted before you choose one.

Business Meals

The deduction limit for business meals is increased from 50% to 100% of costs under IRC section 274(m) by the CAA. The amendment is effective for expenses you paid in 2021 and 2022; however, this rule applies only to meals that you have provided at restaurants. The CAA did not change any rule for entertainment costs, still keeping them not deductible.

Charitable Contributions

Tax breaks for charitable contributions under the CARES Act have been extended; C corporations can apply for cash contribution deduction by up to 25% of taxable income. The deduction for food inventory donations is increased from 15% to 25%. While these breaks can be used for extra benefits, you get more time to manage them as both have a one-year extension.

Pass-through Business Income

The tax hike on pass-through business owners could be greater, most probably due to the changes done in the qualified business income deduction. The current personal deduction based on business income is 20%; there could be a limitation for higher-income taxpayers or eliminated completely.

Currently, the net investment income (NII) tax of 3.8% only applies to silent partners. The proposal would impose the tax on all pass-through income, regardless of the owner’s role in business activities.

Corporate Profits Minimum Tax (CPMT)

Corporations reporting more than $1 billion in profits to shareholders would need to pay a 15% alternative minimum tax on the adjusted financial statement according to the proposed law. This applies to income and preserves the general business credits’ value, enabling business taxpayers to apply for an AMT foreign tax credit. The new law is set to be effective after Dec 31st, 2022.

What Should You Do?

Regardless of your business type, tax rates that are likely to be changed in 2022 will have a significant effect on your taxes. Since the proposal would raise the corporate tax rate from 21% to 26.5%. So what you can do is instead of taking the typical route of attempting to defer income at year-end, you may accelerate it into 2021 so that it may be taxed at a lower rate. Similarly, you may consider deferring costs of equipment purchase until January in order to make the write-offs worth applying. There are several such ways you can strategically plan your taxes and save more.

However, you need to prepare such strategies according to your specific situation, considering your income and expenditure, both current and projected. Luckily, you now have more time for filing your current-year federal income tax return, thereby having enough time to strategize tax preparation.

In case your business follows the calendar year for tax purposes, the extended filing deadline is;

  • 10/17/22 – for sole proprietorships – Form 1040
  • 10/17/22 – for C corporations – Form 1120
  • 09/15/22 – for partnerships – Form 1065
  • 09/15/22 – for LLCs taxed as a partnership – Form 1065
  • 09/15/22 – for S corporations – Form 1120-S

Get Updated about Tax Legislations

If you do taxes on your own, the same advice would be for you too. Prepare a plan for managing estimated tax returns and prepare to pay attention to all tax changes so that you can maximize your deductions and minimize tax liability.

Every business, accounting firm, and CPA firm must have qualified and competent tax accounting staff to eliminate or resolve the complexity involved in tax preparation. First things first, you need to make sure your staff is updated about all tax changes and how they impact your taxes. If required, you may use tax software that can do most tax-related clerical work at speed. If the software is something out of your budget or interest, your next best action can be tax preparation outsourcing. Given outsourcing can be a cost-effective solution, it can be the best fit if recruitment or training isn’t feasible for you at the moment.