While the COVID-19 crisis has lessened from its initial peak, international events have led to supply chain issues and inflationary prices which have significantly impacted the construction industry. Since income may not rise at the same rate as expenses, saving on income taxes can help keep you in the black.
There is still uncertainty over whether any pieces of President Biden’s proposed tax plan will be implemented. If legislation is enacted, it could mean higher tax rates for both individual and corporate taxpayers. The results of the midterm elections will most likely influence whether this legislation moves forward. As always, we are monitoring these developments and will alert you as soon as any legislation is signed into law. For now, it’s a good time to get a handle on what your 2022 income might look like so that, if legislation is passed, we will be able to project how it will affect you.
Here are some potential tax savings ideas to think about over the summer that may be beneficial to construction contractors.
- Consider adjusting your tax withholding or estimated payments. If you owed taxes for 2021, you may want to revise your Form W-4. To help you do this, consider using the IRS’s “Tax Withholding Estimator,” available here. If you make estimated tax payments throughout the year (which is likely the case if you are an independent contractor, for example), we can take a closer look at your tax situation for 2022 to make sure you’re not underpaying or overpaying.
- Take advantage of lower tax rates on investment income. Gains from the sale of an investment held for more than one year (as well as dividends on certain stocks) are generally taxed at preferential capital gains rates. Those rates are zero percent, 15 percent, and 20 percent for most investments. The applicable rate depends on your taxable income.
If your income is too high to benefit from the zero percent or 15 percent rates, gifting investments such as appreciated stock or mutual fund shares to children, grandchildren, or other loved ones may be a good strategy. If these individuals are in the zero percent or 15 percent capital gains tax bracket when they later sell the investments, any gain will be taxed at the lower rates if you and your loved one owned the investments for more than one year. Dividends from any gifted stock also may qualify for the lower rate.
However, beware of the “Kiddie Tax,” which applies to all children under age 18 and most children age 18 or age 19–23 who are full-time students. It may limit your opportunity to take advantage of this strategy. Also, beware of a potential increase in both long-term capital gains rates and ordinary income tax rates heading into 2023.
- Time investment gains and losses. As you evaluate investments held in your brokerage accounts, consider the tax impact of selling appreciated securities before the end of the year. President Biden has proposed a plan that would increase long-term capital gains rates to 39.6 percent for taxpayers making over $1 million. Combined with the Net Investment Income Tax (NIIT) of 3.8 percent, affected taxpayers could see a 43.4 percent marginal long-term capital gains rate, which is quite an increase from the current combined rate of 23.8 percent. Selling securities that have declined in value may need to wait until 2023 to offset the potential higher tax rate. Losses realized will offset any gains you may have realized. Your net capital loss is limited to $3,000 of ordinary income annually, but any excess carries over indefinitely.
- Check your deduction strategy. Generally, it’s best to itemize your deductions if your personal expenses, such as mortgage interest, charitable contributions, medical expenses, and taxes, exceed the standard deduction. For 2022, joint filers can enjoy a standard deduction of $25,900. The standard deduction for heads of household is $19,400, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,950. However, “bunching” your deductions, when allowable, may offer the best of both worlds. For example, you can pay two years’ worth of property taxes in a single calendar year, or double up on charitable giving every other year. If that is enough to get over the standard deduction amount, you’ll get a bigger deduction every other year, yet part with the same amount of cash.
- Take advantage of Section 179 expense and bonus depreciation. If your business plans to purchase new or used machinery or equipment prior to year end, you may be able to expense the entire cost in 2022. Under Section 179, taxpayers can elect to expense up to $1,080,000 of qualified purchases, subject to taxable income limitations.
Alternatively, your business can take advantage of 100 percent first-year bonus depreciation. Unlike the Section 179 deduction, claiming 100 percent bonus depreciation is not limited to taxable income, although another limitation could apply. Many factors can influence this decision, including current and future tax rates. With the possibility of higher rates in 2023, the best choice may be to wait and see if you are going to be subject to a higher tax rate before you acquire assets, if it is feasible to hold off. Also, under current law, 100 percent bonus depreciation is scheduled to be reduced to 80 percent for property placed in service in 2023. If you’re thinking of acquiring business property between now and the end of the year, we can help you navigate that decision.
- Consider business meal expenses. Normally, business meal expenses are limited to a deduction of 50 percent of the total costs. However, for 2022, food and beverages provided by a restaurant are allowed a 100 percent deduction. Taxpayers who use the per diem method may treat the entire meal portion of the per diem rate paid or incurred in 2022 as being attributable to food or beverages provided by a restaurant, making the meal per diem 100 percent deductible. As such, you may want to move any business meals originally planned for early 2023 into late 2022 to obtain the higher deduction.
These are just a few general items to consider to help minimize your construction company’s and your personal tax liability for 2022. Tax planning is often challenging, and usually even more so in an election year, but spending time strategizing now may reduce the risk of late-year surprises.
Carlo R. Ferri can be reached at Email or 215.441.4600.
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