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Preparing for Filing Your Business Tax Return and Tax Changes in the 2022 Filing Season

Business owner filing his business tax return

It's an annual chore: filing income tax returns for your business. This includes filing federal income tax returns, as well as state and local returns, for businesses and for owners. There is no way to avoid this chore. The best way to handle this responsibility is to be prepared and get started as soon as possible.

When Are Business Taxes Due in 2022?

Pay attention to the filing deadline for 2021 income tax returns. If you miss the deadline, you may incur late-filing penalties (additionally, these penalties are not tax-deductible). The following are federal income tax return deadlines:

  • For entities: Partnerships and S corporations reporting on a calendar year basis, which most do, must file their 2021 income tax returns by March 15, 2022. Calendar-year C corporations must file their 2021 income tax return by April 18, 2022 (April 19 if in Maine or Massachusetts). Limited liability companies (LLCs) with multiple members file partnership returns unless they have elected to be taxed as corporations; one-member LLCs file their return with the owner's personal tax return. Sole proprietorships also file their return with the owner's personal tax return.
  • For owners: Business owners must file their personal 2021 income tax returns by April 18, 2022 (April 19 if in Maine or Massachusetts).

Check your state for its filing requirements. Many states have the same filing deadlines as the ones for federal income tax purposes. If you do business in more than one state, you may have to file multiple state income tax returns. Pay special attention to filing requirements for businesses doing internet-based transactions. Some states consider this a sufficient connection ("nexus") to them such that state tax returns are required there.

The federal filing deadline may be extended if you are located in an area that's been declared a federal disaster area. Usually, there is an automatic 60-day filing extension for disaster victims, but the IRS may grant even more time to file. For example, victims of Hurricane Ida that began in Louisiana on August 26, 2021, and who had obtained a filing extension (explained below) for their 2020 income tax returns to October 15, 2021, were given until February 15, 2022, to file those returns. The IRS provides more information about filing extensions for disaster victims.

File an Extension for Business Taxes

If, for any reason, you cannot meet the applicable filing deadline, you can obtain an automatic six-month filing extension just by asking for it. You must submit the request no later than the filing deadline. You do not have to provide a reason for the request. Entities use IRS Form 7004 to request a filing extension. Individuals (including one-member LLCs) use IRS Form 4868.

If you are a partnership or S corporation engaged in certain foreign activities, you must file new Schedules K-2 and K-3 with the 2021 return. However, the IRS has noted a delay ("interim period") in accepting these schedules through the modernized e-File (MeF)/Extensible Markup Language (XML), so obtaining a filing extension may be necessary. If you want to e-file on time before the applicable interim period, submit the schedules as separate PDF files attached to the return.

Getting more time to file the return does not give you more time to pay taxes due. It's advisable to pay as much as you expect to owe to minimize or avoid late-payment penalties. These penalties start to run from the filing deadline without regard to extensions.

How To File Taxes for a Business

Most business tax returns are e-filed. According to the 2020 IRS Data Book, 93% of S corporation returns were e-filed during the government's 2020 fiscal year ending September 30, 2020. There are two very good reasons for this:

  1. E-filing is the quickest way to have a return processed, especially given IRS personnel problems and a backlog of processing paper returns.
  2. Tax return preparers who file more than 100 returns in the 2022 filing season must e-file (and next year the threshold drops to 10 returns), with very limited exceptions.

Choose Your Tax Preparation Method

Decide as soon as possible who is going to prepare and file the return(s). Will you use a CPA or other tax professional? Will the business returns be handled in-house by a company employee? Are you planning to prepare your business and personal returns using tax preparation software?

If you want to use a CPA or other tax professional, as most businesses do, and haven't been working with one, explore your options. Make sure you vet them before making a selection. The IRS has tips on choosing the right tax return preparer for your situation.

If you work with a tax professional, schedule an appointment as soon as possible to discuss your situation. With COVID-19, appointments that used to be in person may be managed by phone or online.

Gather Your Tax Records

Tax return information is based on the records you have on income and expenses for the year. Typically, this information is in your desktop or cloud-based accounting system and can easily be accessed by a tax professional or other return preparer to complete the return. For example, payroll information about what the business paid in wages and compensation as well as employment taxes — all of which factor into the income tax return — should be easily found in your accounting system.

In addition to annual income and expenses tracked in the accounting system, be sure to have various records and other information on hand to help with return preparation:

  • Prior year returns. These show potential carryovers that can be used on current returns to reduce tax liability. They include, for example, net operating losses, general business credit, and capital losses.
  • Information about owners' investments. Because partnerships and S corporations pass through income and losses to owners, it's essential that owners know their "basis" in their company. If losses are passed through, they are deductible on an owner's return only to the extent of such basis. For example, an S corporation owner's basis is the amount invested in stock or loans made by the owner to the corporation. Basis information must be included on tax returns (e.g., using new Form 7203 and, where losses are claimed, on Schedule E of Form 1040 or 1040-SR). Partnerships must report on Schedule K-1 of Form 1065 a partner's beginning and ending capital account. The capital account is the amount of capital contributed to the partnership during the year, the partner's share of the partnership's current year net income or loss as computed for tax purposes, any withdrawals and distributions made to the partner by the partnership, and any other increases or decreases to the capital account.
  • Asset information. If the business sold assets, it's necessary to have information about their basis to figure gain or loss. For example, if the business sold a building, basis used to determine gain or loss takes into account what the business paid for the building, depreciation claimed for it, and other adjustments.

Supplemental Tax Information

Business deductions and credits cannot be created out of thin air and must be substantiated by receipts, invoices, canceled checks, and other documentation. This supplemental tax information is not submitted with the return, but should be retained and easily accessible in case of an audit.

In addition to receipts or other paperwork that prove expense amounts, tax law requires additional documentation in some situations. Examples of required documentation include:

  • Special recordkeeping for travel, meals, vehicle, and business gifts. Receipts alone are not sufficient to back up deductions claimed for these expenses. Required records are explained in IRS Publication 463.
  • Substantiation for charitable giving. If the business made donations of $250 or more, a written acknowledgment from the organization is required. This and other substantiation rules for charitable donations are in IRS Publication 526.

Consider the Impact of Out-of-State Workers

For federal income tax purposes, the fact that COVID-19 caused many businesses to have employees work from home is not important. But for state and local income tax purposes, this situation may create tax filing problems. Businesses normally file their state income tax returns according to "nexus," meaning where they have a business connection. Typically, this is where the company is physically located ("physical presence"). However, having workers in another state may create the nexus sufficient to require filing an income tax return and paying state and local taxes in that location.

Check the income tax rules for all states in which you have employees working remotely (you should know who they are through your payroll system) to determine if you have income tax obligations there.

Consider Post-Year-End Tax Saving Strategies

The calendar shows that last year has ended, but the opportunities for obtaining additional tax deductions are still available. These involve taking certain actions and making certain elections on tax returns. Here are some examples:

  • Maximize retirement plan contributions. The deadline for making tax-deductible contributions to a qualified retirement plan is the extended due date of the return. Don't have a qualified retirement plan for the business? One can be set up and funded through the extended due date. More information about setting up and contributing to a qualified retirement plan may be found in IRS Publication 560.
  • Decide how to write off the cost of equipment. If the business bought equipment, machinery, or certain other property in 2021, there are a number of ways to deduct the cost. These include first-year expensing (Section 179 deduction), bonus depreciation, regular depreciation, and a de minimis safe harbor election. The decision on which method to use is made when the return is filed. The choice can affect taxes this year and in years to come. More information about these options is in IRS Publication 946.
  • Check for research credit refunds. If your company engaged in research activities in 2021, you may not be able to use the full tax credit figured on research expenditures. The credit, which is part of the general business credit, is subject to a one-year carryback. If you're making a claim for a refund based on the research credit, be sure to include all information that's now required.

Business Tax Changes To Be Mindful of When Filing in 2022

Whether you're an experienced business owner or just getting started, tax credits and deductions are continually changing. Here are some new developments that you should be aware of to ensure your taxes are correctly filed and you're not missing anything come the tax deadline in 2022.

As a reminder before taking any action, speak to your CPA, tax professional, and/or legal adviser to determine the best course of action for your business.

Back to Pre-Pandemic Rules

As a result of COVID-19, Congress suspended or changed various tax rules through 2020 that had been set to apply in 2018, 2019, and/or 2020. Now these rules are effective for 2021 returns. They include:

  • Net operating loss (NOL) changes. There is no carryback permitted (other than for farming businesses) for net operating losses arising in 2021. Carryforwards are indefinite but can only offset up to 80% of taxable income in the carryforward years.
  • Business interest expense limitation. Businesses that are not automatically exempt from this rule, such as small businesses, or eligible farming and real property businesses that elect to be exempt, are subject to a cap on the amount of business interest expense that can be deducted.
  • Limitation on losses of noncorporate taxpayers. Owners of pass-through entities are limited in the amount of losses they can deduct on their personal returns. Excess losses become part of owners' NOLs.

Adjustments for Inflation

Each year, the IRS adjusts dozens of tax items to account for inflation. For example, tax brackets have been adjusted for individuals, impacting what owners of pass-through entities pay on their share of business income. Some other items impacting businesses due to cost-of-living adjustments (COLAs) include:

  • Standard mileage rate for business driving. If actual expenses aren't deducted, then the IRS-set rate is 56¢ per mile in 2021.
  • Small employer's health insurance credit. Eligibility for this credit is based in part on wages; the amount has been adjusted for inflation for 2021.
  • Sec. 179 deduction (first-year expensing). Instead of depreciating the cost of machinery, equipment, and other eligible property placed in service before the end of 2021, an immediate deduction up to the 2021 limit ($1,050,000, reduced dollar for dollar for purchases in excess of $2,620,000).
  • Qualified business income (QBI) deduction. The taxable income threshold above which the QBI deduction may be limited or barred has increased for 2021.

New Tax Rules

Legislation in 2021 changed some tax provisions impacting businesses. These include:

  • 100% deduction for the cost of business meals furnished at restaurants. This full deduction applies as well if a business uses a per-diem rate to substantiate the cost of business meals, as long as the meals are provided by restaurants. The IRS has defined the term "restaurant" for purposes of the deduction, which will apply in 2022 as well.
  • State law changes impacting the SALT limitation. About 20 states now have workarounds to allow owners of pass-through entities to avoid the $10,000 federal itemized deduction cap for state and local taxes (SALT). Proposed federal changes to the SALT cap have not yet been enacted.

Other Reminders

When filing the 2021 income tax return, keep in mind some other tax rules. These include:

  • Various employment tax credits that applied in 2021. These were reflected on employers' quarterly employment tax returns (Form 941). But some employment tax credits may impact income taxes. For example, wages taken into account for the employee retention credit are not deductible for income tax purposes.
  • Payment of deferred Social Security tax. Employers and self-employed individuals that opted to defer a portion of Social Security tax were required to pay 50% of the deferred amount by December 31, 2021. The other half is due by December 31, 2022.
  • Estimated taxes for 2022. The first installment of estimated taxes for individuals and calendar-year corporations is due on the same day as 2021 income tax returns are filed. Obtaining a filing extension for the return does not give you more time for paying estimated taxes.

Begin Filing Taxes for Your Business, and Stay Current on Tax Laws

By starting sooner and doing some prep work, you can make filing taxes for your business a more efficient and less stressful process. With changes in the law and new IRS guidance, you'll want to consult with your accountant to ensure you understand what is required to stay compliant, as well as learn about additional opportunities for tax savings available to you through credits.

With the COVID-19 pandemic continuing to impact legislation, be sure to stay up to date on how new laws could affect your business and its compliance obligations. Paychex offers tax services that can help your business navigate the complexities of filing taxes.

barbara weltman
Barbara Weltman is a tax and business attorney and the author of J.K. Lasser's Tax Deductions for Small Business as well as 25 other small business books.
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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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