Year-end tax planning is always challenging due to uncertainties. Will your projected profit (or loss) for 2022 wind up as such? What will 2023 bring? Will Congress change tax rules—favorably or unfavorably (and possibly retroactively for 2022)? Will your state and local government make law changes affecting your business? Despite uncertainties, planning now is warranted to minimize your 2022 tax bill and position you favorably for 2023. In Part 1, I discussed ideas for planning with respect to your employees. Here are some ideas for your operations and strategic planning.
Operations and strategic planning ideas:
Manage your inventory
For most businesses, the two main concerns regarding inventory now are handling supply chain challenges and selling items now and through the holiday season. But tax issues should also be addressed. If you have items sitting on your shelf that won’t move—they’re out of fashion, obsolete, or perhaps damaged—act to gain a tax break:
- Take a write-down by offering items for sale (assuming you don’t use LIFO for your inventory). This sale must be held within 30 days of the end of the year.
- Sell items in bulk to a liquidator. You’ll realize income (or a loss) on the sale of the items. In any event, you’ll raise some cash from the sale.
- Donate items to charity. Benefit a cause and, perhaps, gain a tax deduction for the donation. For example, donate to NAEIR, which is an organization that sees your inventory items land in the hands of those who need them most.
- Dispose of items in the dumpster. Damaged items that can’t be sold or donated should be discarded to make room on your shelves for new inventory.
Charitable giving
Small businesses are always generous, especially to local causes. Companies can benefit—taxwise and in other ways—from charitable giving. Consider:
- Donating cash
- Donating property or inventory (explained above).
- Giving employees time off to volunteer for charitable organizations
Reminder: If you have a leave-based donation program for your company to provide assistance to Ukraine, be sure to complete before January 1, 2023, your cash donations to an IRS-approved charity providing Ukraine relief. Doing this makes employees’ donations to the plan tax free; you don’t even have to report the donated leave time on their W-2s. The business gets the charitable contribution deduction (for pass-through entities, owners claim their share of the contribution as a deduction on their personal returns).
Estimated taxes
Review your taxes year-to-date so that you can cover any shortfalls in the final estimated tax payment. For calendar year C corporations, this is December 15, 2021. The final installment of estimated taxes for individuals (i.e., business owners) for 2021 is January 18, 2022.
Start strategic planning for Q1 2023
Making projections for the coming year are essential in planning your actions. Do you expect the economy to improve? Hiring to get easier? Gas prices to decline? These are just some of the questions to consider. Whatever you concluded, be sure to:
Review your business plan. Update your plan to reflect new ways for reaching your customers, handling your employees, dealing with supply chain issues, managing inflation consequences, etc. For example, think about increasing your prices starting January 1 to account for the increased expenses you face.
Take advantage of new “green” tax rules. For example, if you own a commercial building, the energy-efficient commercial building deduction () in 2023 can be as much as $5 per square foot (compared with $1.88 per square foot in 2022). There are many energy-related tax incentives to review, including:
- New rules for buying a clean energy vehicle—new or used.
- New tax credit for buying a clean energy commercial vehicle
- Tax credit for installing a charging station at your business (if it’s located in a low-income or rural area)
- Credits for renewable energy sources (e.g., an investment tax credit for solar energy at your business property)
Revise your budget. Project your expenses for the coming year (or at least for the first quarter) so you can set a budget. Inflation doesn’t seem to be waning, at least not significantly. Be sure to factor in known increases, such as your insurance premiums for 2023, salary increases you fix now to start next year, and a higher Social Security wage base (projected to be $155,100 in 2023, but this isn’t official).
Schedule annual board meeting. If you are incorporated, state law requires that you hold an annual board meeting. Be sure to schedule this and cover various items. These include compensation to owner-employees and adopting employee benefits plans.
Final thought
So, your year-end planning now so you can devote your time and energy at the end of the year to managing your business and participating in holiday activities with family and friends. Schedule time now to talk with your CPA or other tax adviser to review these ideas and listen to others that your professional can offer to you.
