What business deductions are available?
Qualified business income
Individual taxpayers with qualified business income (QBI) from a pass-through entity (partnership or S corporation) or a sole proprietorship may be entitled to a deduction equal to the lesser of the deductible amount of the QBI or 20% of taxable income. The deduction applies to reduce taxable income and is available whether or not the taxpayer itemizes. The deduction does not impact the calculation of self-employment tax.
The trade or business of being an employee is not a qualified trade or business and, therefore, no deduction is allowed for income from the trade or business of being an employee.
The deductible amount of QBI is generally 20%. However, if the taxpayer’s taxable income (not factoring in the deduction) exceeds $340,100 (for married taxpayers filing jointly) or $170,050 (for all other taxpayers), the deduction is subject to a limitation based on W-2 wages paid by the business.
Limitation on business interest expense
The deduction for net interest expenses incurred by a corporation is limited to the sum of business interest income, 30% of the business’s adjusted taxable income (ATI), and floor plan financing interest, though taxpayers with average annual gross receipts of $27 million or less are exempt from the limit. Further, the limitation does not apply to the trade or business of being an employee, electing real property trades or businesses, electing farming businesses, or certain regulated utilities.
Excess business loss
Taxpayers other than C corporations are not allowed to deduct excess business loss. An excess business loss for the tax year is the amount by which aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer, less the sum of aggregate gross income, exceeds $540,000 (for married taxpayers filing jointly) or $270,000 (for all other taxpayers). Any excess business loss is carried forward and treated as part of the taxpayer’s net operating loss carryforward in succeeding taxable years. Pass-through entities are limited in deducting active business losses against nonbusiness income.
Equipment purchases
Corporations purchasing equipment may make a “§179 election,” which allows them to expense (i.e., currently deduct) otherwise depreciable business property, including computer software and qualified real property. Air conditioning and heating units placed in service since 2016 are eligible and continue to be eligible for this deduction. Certain improvements to nonresidential real property (roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems), that may not be eligible for bonus depreciation, are eligible under §179. Taxpayers may elect to expense up to $1,080,000 of equipment costs (with a phase-out for purchases exceeding $2,700,000). The deduction is subject to a business income limit.
In addition, careful timing of equipment purchases can result in favorable depreciation deductions. In general, under the “half-year convention,” taxpayers may deduct six months’ worth of depreciation for equipment that is placed in service on or before the last day of the tax year. If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers the depreciation deduction.
Bonus depreciation
For property acquired after Sept. 27, 2017, and placed in service during the current tax year, a taxpayer may deduct 100% of the cost of qualified property. Bonus depreciation applies to new as well as used property, so taxpayers planning to acquire a business should consider whether structuring the acquisition as an asset acquisition rather than a stock acquisition would be advantageous.
Vehicles weighing more than 6,000 pounds
A popular strategy is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated more than 6,000 pounds). Doing so wouldn’t subject the purchase to the dollar limit for depreciation of passenger vehicles of $11,200 in 2022 (if bonus depreciation is taken, the amounts increase to $19,200). For SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $27,000.
NOL carryforward and carryback
If a corporation expects to suffer a net operating loss (NOL) for the tax year, it may generally carry the loss forward indefinitely. A farming loss may be carried back two years or forward indefinitely. Non-life insurance companies with a net operating loss may carry the loss back two years but may only carry the loss forward 20 years. Corporations may elect to waive the carryback period and instead choose to only carry forward losses. If the taxpayer has any net operating loss carryforwards from prior tax years, deductions for losses arising before 2018 are deductible up to 100% of taxable income, while deductions for losses arising after 2017 are limited to 80% of taxable income.
A corporation that expects a tax loss for the current year and that has paid estimated taxes should consider seeking a quick refund of overpayments. A corporation may file Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to recover any overpayment of estimated tax for the tax year over the final income tax liability expected for the tax year. Be aware that if a corporation has a loss one year and income the next, it will have to make estimated tax payments for that next year.
Inventories of subnormal goods
A business should check for subnormal goods in inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If a business has subnormal inventory as of the end of the tax year, the taxpayer can take a deduction for any write-downs associated with that inventory provided they offer it for sale within 30 days of the inventory date. The inventory does not have to be sold within the 30-day timeframe.
Business travel, meals, and entertainment expenses
Although significantly limited, business deductions for meal and entertainment expenses are still available in certain circ*mstances.
Charitable contributions
A charitable contribution deduction is available to businesses. A corporation is generally allowed to deduct charitable contributions up to 10% of its taxable income for cash contributions. Under the CARES Act, the corporate limitation was temporarily increased to 25% of taxable income for cash contributions made in calendar year 2021. Contributions from pass-through entities are allocated to individual equity interest holders and are subject to the individual’s limitations. An individual is generally allowed to deduct charitable contributions up to 60% of adjusted gross income. Certain contributions of property are subject to additional limits as well as additional recordkeeping and substantiation requirements.
