Updated: Nov 21
It’s Halloween and the Compass CPA team has some tricks and treats to help you prepare for the 2022 tax season. With the busy holiday season officially here filling your calendar with plans of travel and winter activities, time will move very quickly and it will be 2023 before you know. Here is your official two month notice with an end-of-year tax prep task and reminder list.
Things to do by December 31st, 2022
Accountable plan reimbursements & home office expenses
Record your mileage
Defer or speed up income and expenses
Think about 2023 S-corp election
Have your financials clean and ready for your tax accountant
Plan for your retirement contributions
Tally up home improvements
Annual gift & 529 or ESA contribution
Tax harvesting & realizing losses
Plan for residency changes
Create an IRS account
For Business Owners
The 1099 filing deadline for 1099-NEC is January 31st, 2023. You can avoid a lot of stress by checking on all contractors that you’d paid over $600 to in the calendar year and verifying that you have a W9 on file. Coordinate with your accountant to get a list together for review by the end of November so you can request missing W9s in December. Remember, you should have a W9 for all legal work, whether or not the law firm is a corporation. Remember that contractors that were paid with a payment platform such as Venmo or Paypal who were paid as “friends and family” will need a 1099 sent by your business too. Otherwise, you can exclude payments made with a credit card, debit card, Paypal, Venmo, or other payment processors that are required to send 1099-Ks.
Accountable Plan Reimbursements and Home Office Deduction
S-corps and C-corps must follow an accountable plan for taking home office expenses. Single-member LLCs and and sole-proprietors can file Form 8829 - Expenses for Business Use of Your Home. Partners in a partnership can claim Unreimbursed Partnership Expenses (UPE) on Schedule E of their 1040. All of these mechanisms work very similar except there are some key distinctions.
Firstly, you should create a home office expense factor by determining the size of your home office that you use exclusively and regularly for business and the total square footage of your home. Once you have this, you can divide the total square footage of your home by the home office square footage to get your home office factor.
Here is a list of items that can be included in the cost of your home:
Mortgage interest (if owned) fees
Rent (if rented) fees
Property tax fees
Mortgage insurance fees
Home insurance fees
Repairs and maintenance fees
Snow removal fees
Lawn & landscaping fees
Expenses that are 100% for the use of your business
Multiply the sum total of all your home office expenses by your home office factor to get the total reimbursable amount. Do not include expenses that are 100% for the use of your business. These are 100% deductible and reimbursable if paid for personally.
All corporations, whether S-corp or C-corp, should actually reimburse this by moving money from the business bank to your personal bank since it is required in order to take advantage of these deductions. All partnership or LLC owners and sole proprietors can simply calculate the home office factor and summarize your expenses since the deduction can be taken by completing the UPE or home office worksheet without moving cash.
Record Your Business Mileage
Take a screenshot of your vehicle’s mileage on New Year’s Day. If you did this every year, you’ll be able to easily calculate total mileage driven in the year which is required on the IRS auto worksheet. You should be keeping a routine mileage log since it’s very difficult to record a year’s worth of mileage. Consider these apps to help automate or track mileage:
Remember mileage logs should have dates, starting locations, ending locations, and business purposes of a trip at a minimum. Remember that commuting to your office is not eligible for deduction. Lastly, remember that corporations should actually reimburse these expenses by December 31st, 2022 to get the deduction. LLC or partnership owners and sole proprietors can simply use the logs to complete the IRS auto worksheet by filing time.
Defer or Speed-up Income and Expenses
Businesses on the cash method of accounting for tax purposes should be very cognizant of their end-of-year cash flows. Work with your tax accountant to determine whether you need more tax mitigating in the current year or the next year. If you’re business income is high in the current year, you should consider deferring customer collections to 2023 or making expense payments by 12/31/22. However, you should also consider what you’re expecting in the 2023 year. You might want to push more liability in 2022 to help mitigate taxes in 2023 if you’re expecting a large growth. Making holiday bonus payments, prepaying contractors, and purchasing capital assets are all good ideas to consider for incurring additional expenses.
Consider 2023 S-corporation Election
Start talking to your tax accountant now about whether it’d be beneficial for your business to make an S-corporation Election for 2023. The due date for filing is March 15th, 2023**.** There are many considerations that your tax accountant should help you weigh heavily. If an S-corp is a good fit for your business, it could save you a lot of money on self-employment taxes.
Have Business Financials Clean and Ready for Your Tax Accountant
Lastly, you should make sure all your income and expenses are gathered, organized, and ready for your tax accountant. The cleaner your financials and the sooner you can give them to your tax accountant, the sooner they are likely to complete your 2022 filings.
You should make sure you can substantiate all balances on your balance sheet with supporting schedules. Check all your deferrals and accruals if you’re on the accrual method of accounting. Bank reconciliations should be up to date and you should be working with your accountant to double check your transaction categorization.
For Individuals and Families
Make Charitable Contributions
Whether donating cash or property to a registered 501(c)(3), you should make sure it’s done by December 31st, 2022. Make sure you have all your receipts together. Save everything in one place and prepare a summary for your tax accountant.
The maximum contribution for 2022 is $3,650 for individuals and $7,300 for families. The catch-up contribution for individuals over 55 is $1,000. Although it does not need to be funded until April 18th, 2023, you should make decisions earlier so you plan for cash flow purposes.
Plan Your Retirement Contributions
It’s a good idea to check your current year-to-date contributions to your retirement account to see if you can afford to max out the contributions.
Workers who are younger than age 50 can contribute a maximum of $20,500 to a 401(k) in 2022. If you're age 50 and older, you can add an extra $6,500 per year in "catch-up" contributions, bringing your total 401(k) contributions for 2022 to $27,000. Contributions to a 401(k) are generally due by the end of the calendar year for Traditional 401(k) plans.
The individual contributions for a SEP or Solo 401(k) are also the same as the Traditional 401(k), but the due date is either the due date of the original tax return or of the extended tax return date. This gives you a lot more time to fund your contribution. Your business can also contribute 25% of your salary or up to $61,000 in 2022. This is considered a business deduction that results in lowering your tax liability. A great way to max out retirement and tax savings.
Traditional IRAs have a limit of $6,000 per individual (or $7,000 if older than 50 years old). Their due dates follow the same rules as SEP and Solo 401(k)s, so either April 15th, 2023 or October 16th, 2023 (if you’ve extended).
There are many other retirement accounts that you and your business can utilize, such as a defined benefit plan, a self-directed IRA, a profit sharing plan, or a Section 412(e)(3) plan. These plans offer even more saving potential. Talk to your financial planner and tax accountant to learn more and see if these plans could be a good fit for you.
Tally Up Your Home Improvements
Every year you should provide your tax accountant with all home improvements so they can track your home’s basis to keep you prepared for future sales or taking depreciation in the current year. Create a summary in excel with a folder of all paid receipts.
Annual Gift & 529 or ESA Contribution
The 2022 gift tax exclusion limit is $16,000 per individual ($32,000 for two spouses). If you have children it’s a great idea to contribute this amount to a 529 Plan or an ESA (Education Savings Account). This is a way for you to help fund your children’s education in a way that they are not taxed for the money gifted and the appreciation on the assets in the 529 Plan or ESA are not taxable if used on qualified education expenses. 529 Plans, like ESAs have for a while now, allow expenses for K-12 education now, not just college and beyond.
Tax Loss Harvesting and Realize Losses
Another thing to consider in down markets is selling of stock and investments that are at a loss and no longer fit in your investment portfolio. They call it tax loss harvesting because you can take these losses and carry them in forward to years when you do have capital gains to offset them in the current or future years. Also, you can potentially offset up to $3,000 of ordinary income in the current year.
Plan for Residency Changes
Did you move in the current year? Have you been out of the country for 330 days? Do you know the tax implications of your move? Are you satisfying residency conditions? All of these questions are things to consider when moving.
Every state has different rules for calculating and sourcing income tax liability to their jurisdiction. Providing dates of residency to your accountant before year end will allow them to run calculations for taxes owed to each state so you can make any final estimated tax payments in January.
Also your tax accountants can help coach you on being compliant with claiming residency or non-residency. California and New York are especially notorious for routine residency audits. You can save yourself a lot of headaches by updating your mailing address with USPS, registering to vote, getting a new driver's license or ID, getting new health insurance, and many other items to help you satisfy changing your state of domicile.
If you’ve been out of the country for 330 days of the year, you’ll likely qualify for a Foreign Earned Income Exclusion deduction.
When the market dives, that is typically the best time to consider a Roth conversion. This is due to being taxed at the market value of your conversion. This means you pay the taxes now on your assets that have a lower value than later in life when you plan to retire and take distributions at a higher value of those assets, hopefully. Remember Roths are not taxed upon distribution since you’ve already paid the tax. Therefore strategically do conversions in down-market years to mitigate the life-time tax you incur on those assets.
Create IRS & State Tax Accounts
Creating an account with the IRS is easy to do and very helpful to you and your tax accountant. You can do so through this IRS registration link. Once you have an account, you can request tax transcripts, get copies of estimated payments you’ve made, and see any tax liability you might have. This is just to name a few of the things you can do. Providing your accountant with copies of this data can help verify payments, request income data expected, and tackle any balances you might have a lot quicker. Most states have a similar portal that you can create accounts for.
MEET WITH YOUR TAX ACCOUNTANT
Last, but certainly not least, you should meet with your tax accountant. It’s always best to update your tax accountant before the end of the year on where you’re expecting to end up or what changes have occurred in your life relating to income and tax. Give your tax accountant end of year paychecks with year-to-date earnings and/or an updated profit and loss from your business. You have one last chance to make timely tax payments for any liability owed by 1/16/2023.
Remember there are no one-sized fits all for tax advice or strategies. Schedule time with us at Compass CPA to see if these tips might be a good fit for you!