This article originally appeared in the April 2022 issue of Security Business magazine. When sharing, don’t forget to mention Security Business magazine on LinkedIn and @SecBusinessMag on Twitter.
With the majority of security businesses having already filed or postponed their 2021 taxes, it is time to think about the new ballgame that is 2022 taxes. The controversial Build Back Better bill may or may not emerge to foil any planned tax savings; however, far more certain are the many changes and new taxes to be faced in 2022.
Our tax laws may change, and the IRS may impose new rules and/or limit write-offs; however, one thing that will never change is the importance of tax planning. Substantial tax savings are possible with planning, especially planning not at year’s end but during the course of the year as a security business operates.
Many currently misunderstood or neglected law provisions are already on the books. The Coronavirus Aid, Relief and Economic Security (CARES) Act, for example, allowed employers to defer deposits and payments of their share of Social Security taxes from March 27 through December 31, 2020. While 50% of those deferred amounts was required to be deposited by December 31, 2021, any remaining amount must be deposited by January 3, 2023.
The deferment of payroll taxes isn’t the only potential problem or opportunity that many security businesses will face in the months ahead. Here’s an overview of potential 2022 tax savings and loopholes, as well as deferred payments and potential landmines, as security businesses prepare for next year’s bill.
Independent Contractor Classification
The controversy over who is and is not an independent contractor continues in 2022. A new form, 1099-NEC (Nonemployee Compensation), should make it easier for the IRS to track independent contractors and those using or claiming independent contractor status.
If your security business uses independent contractors, now is the time to ensure that those who are calling themselves independent contractors truly are. Fortunately, IRS Form SS-8 can be filled out either by workers or an employer to obtain an official IRS determination on worker status.
Hiring Tax Credits and Rules
The Work Opportunity Tax Credit (WOTC) is a tax credit (not a deduction but, rather a direct reduction of the operation’s tax bill) available to employers hiring individuals from targeted groups who have faced significant barriers in employment. The credit amount for the WOTC can be up to $9,600 for each qualified new hire, depending on the targeted group the new hire is drawn from. The WOTC has been extended through 2025.
According to the IRS, an employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups under section 51 of the Code: Veterans; recipients of assistance, such as supplemental nutrition assistance, state assistance as part of the Social Security Act (SSA); those formerly incarcerated, previously convicted of a felony or have completed a rehabilitation plan or program; and individuals experiencing long-term unemployment.
Learn more about the WOTC at www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit.
Signing Bonuses: Just like those in professional sports, signing bonuses are becoming more and more common as security businesses compete for qualified employees. From a payroll tax angle, when the security business pays a signing bonus – or any bonus – it is considered “supplemental” income and requires a higher withholding rate. Bonuses are not considered deductible expenses for sole proprietorships, partnerships or limited liability companies (LLCs) because the owners/partners/members are considered to be self-employed.
Deduction Opportunities
Depreciation: 2022 might be the best year, tax-wise, to acquire needed equipment and business property or make large capital improvements. Bonus depreciation enables a business to deduct a large percentage of the cost of purchased business assets, such as equipment, in the first year of their use. Bonus depreciation will remain at 100% through the end of 2022. It will then decrease by 20% each year.
Business Meals: Aimed at helping beleaguered restaurants that continue to suffer, a business can take clients and customers, potential or existing, to lunch or dinner at the expense of Uncle Sam. That’s right, 100% of the cost of business meals, for 2021 and 2022, instead of the usual 50%, are tax-deductible. This deduction applies to employees traveling on business, although it must be for food or drinks provided by a restaurant.
Mileage: The standard mileage rate used by so many small businesses in the security industry has been increased for the 2022 tax year. Reflecting the higher price at the pumps, the 2022 rate for vehicles – including passenger automobiles, vans, pickups and panel trucks – is 58.5 cents per mile when used for business purposes. Any related tolls and parking fees can be added to these amounts. Keep in mind that if there are more than five vehicles used for business purposes, the standard mileage deduction will not apply.
QBI: The Qualified Business Income (QBI) deduction allows a security business owner who make less than $64,900 during the 2022 tax year to claim up to a 20% deduction from their taxable business income. In general, total taxable income this year must be under $170,000 for single filers and $340,000 for joint filers. Over that limit, complicated rules determine whether the business income qualifies for a full or partial deduction.
Business Entity Classification & Related Parties
Much has been written about the special treatment of income from so-called “pass-through entities” such as partnerships, S corporations, etc. There is no doubt discrepancies will continue in the months ahead in the tax rates for individuals, incorporated security businesses and pass-through entities. Changing business entities will help reduce risk exposure, help the operation attract investors or lower the operation’s tax bill. Naturally, the IRS will require adjustments in income and deductions to ensure they won’t lose revenue as a result of the switch. In general, entity switches must occur within the first few months of a tax year although there are numerous exceptions.
Related-Party Transactions: All-too-often unsuspecting business owners find themselves facing penalties, fines and substantial tax bills because the ever-vigilant IRS has ignored a past transaction it views as having been conducted by “related persons.” Below-market-rate loans, sales of property, installment sales, like-kind exchanges, intercompany transactions, etc., all may suffer from special tax treatment. The IRS defines “related” parties not only as family members of the owner or shareholder, but also friends, officers, suppliers, etc., related to the business.
Death of Paper
Records, such as receipts, cancelled checks and other documents must be kept as long as they may become material to the administration of our voluminous the tax laws.
What happens if the paper records are exposed, scattered or lost in a hurricane, tornado or similar catastrophe? If records are stored someplace that is vulnerable, at least put some roadblocks, such as a safe, in place to deter crooks or combat natural disasters.
Today, most security businesses have gone paperless and store everything electronically. According to the IRS, electronic records are just as official and the paper originals.
Mark E. Battersby is a freelance writer who specializes in tax-related issues. Email him at [email protected].
