Small business tax changes for 2022: What to expect
9 min read
February 02, 2022 • Block Advisors
Whether you’re self-employed or a small business owner, your day-to-day tasks likely don’t include keeping up with small business tax changes. While taxes may already be a challenging area of your business, knowing what small business tax law changes to look out for this year can make filing even more daunting.
Luckily, Block Advisors can help. In this post, we’ll guide you through the must-know tax law changes in 2022 (for 2021 tax returns), so you can file your business taxes with accuracy and confidence. Plus, we’ve included two important callouts for your individual taxes.
How does new tax law affect small business?
But first, let’s answer, “how does new tax law affect a small business?” In general, tax law changes can affect self-employed tax deductions, credits, due dates, forms required, and more. It can be to your advantage to stay up to date on business tax changes to maximize your tax savings and ensure you’ve filed an accurate business tax return.
Want help? Lean on Block Advisors tax experts to take care of your small business tax preparation for you.
9 Must-know tax law changes for 2021 returns as a small business owner
If you’re questioning, “what are the proposed tax changes for small businesses?” We’ve got the answers. We’ll outline the major tax law changes for 2022 and how it could impact your filing. Review each of the topics below or skim ahead to the 2022 tax reforms that apply to you.
1 – PPP tax reporting
If you took a Paycheck Protection Program loan in 2021, you do not need to include the loan proceeds as income on your tax return even if the loan was forgiven. You can, however, deduct qualifying expenses paid with money received from a forgiven PPP loan.
Have a partnership or S Corporation? You will pass the tax-exempt treatment of the income along to your partners and shareholders. Additionally, the tax basis of partnership and S Corporation shareholders will not be reduced due to the exclusion of these amounts from gross income.
Note: While it’s excluded from your gross business income, your paycheck protection loan should be included in your gross receipts in certain cases, which include the gross receipts test for small business taxpayers that is used for many things such as to see if you’re eligible to use the cash method of accounting, or are a tax-exempt organization.
2 – Economic Injury Disaster Loan (EIDL) Advance loan reporting
Tax rules for EIDL Advances are similar to that of the PPP. For example, if you received an Economic Injury Disaster Loan in 2021, you won’t need to include the loan proceeds as income on your tax return. Also, if you received an EIDL advance or targeted EIDL advance you can exclude the amount from income even if the amount was forgiven. Additionally, you could deduct qualifying expenses if you used money from an EIDL that was forgiven.
If you have a partnership of S Corporation, you’ll pass the tax-exempt treatment of the EIDL advance to your partners and shareholders. The tax basis for partnership and S Corporation shareholders will not be reduced as a result of the EIDL advance amounts being excluded from gross income.
3 – A tax law change for 2021-2022: Business meals are 100% deductible
This tax law change offers a business deduction almost any business could use! To boost patronage to restaurants in 2021 and 2022, Congress increased the business meal deduction to 100% (from 50% in previous tax years). The deduction applies to dine-in, catered, and take-out business meals. A 50% limit still applies for food and beverage not from restaurants.
The good news about this small business tax law change is that you didn’t need to plan for it in advance! As long as you have your 2021 receipts, you can include deductions from qualifying meals on this years’ taxes.
Keep in mind:
- Your meal must be ordinary (typical) and necessary to your business
- You or an employee is present
- You’re meeting with a business contact – like a vendor, client, or client
- The meal isn’t extravagant or lavish in the eyes of the IRS
Remember: If your small business hosts a meal in 2022, keep your receipts so you can claim a small business tax deduction next year.
4 – Sick leave reporting changes for the self-employed
Form 7202 is used by self-employed people to figure the amount to claim for qualified sick and family leave equivalent credits under the Families First Coronavirus Response Act. For 2021, self-employed individuals that have taken leave and wish to take advantage of these tax credits should claim them by filing Form 7202, but keep in mind these credits expired during 2021 and will not be available for 2022 returns.
The good news is that even though the qualified sick and family leave credits expired there will still be a general business credit available to employers with a written policy in place that provides paid family and medical leave and satisfies minimum pay requirements. Note that this credit will be claimed using Form 8994 and that it will be available to all qualified employers, not just the self-employed.
5 – Business interest expense rate returns to previous levels
Have a loan for your business? You may be able to deduct a portion of the interest from your tax bill. But exactly how much you can deduct is what’s changed.
- As part of previous pandemic relief tax law changes for businesses, the deduction limit was bumped up to 50% (from 30%) of the taxpayer’s adjusted taxable income.
- For 2021, the previous rule is no longer applicable and the 30% rate applies once again.
Note this deduction limit only applies to certain businesses with gross receipts exceeding $26 million (for 2021).
6 – Excess business loss limitation will begin again in 2021
Noncorporate taxpayers: Did you know there’s a cap to the amount of business losses you can deduct? For 2021 taxes, a business loss that is more than $262,000 (unmarried) or $524,000 (married) is no longer allowed.
If you have more losses than the cap allows, you may be able to carry the loss forward as a Net Operating Loss. See the next section.
Read more about business losses.
7 – Net Operating Losses rules differ from last year
Did your business losses outweigh your business income (from all sources)? If yes, you may have a Net Operating Loss (NOL).
What’s tricky with NOLs is that rules have changed more than once in recent years. Knowing what tax changes apply to your 2021 small business return can be confusing.
Two tax law changes for 2021 are important if your small business has a net operating loss:
- Losses can no longer be carried backwards. If you have an NOL in 2021 (or beyond), it can only be carried forward. In fact, you can carry your NOL forward indefinitely. Note there is an exception for certain farming and insurance company losses.
- A NOL deduction can’t exceed more than 80% of taxable income (taxable income for the year in which it is carried to, determined without regard to the NOL deduction), which means NOLs can no longer zero out taxable income. Additionally, the 80% limitation doesn’t apply to a property and casualty insurance company.
8 – Looking ahead: Electronic payment tax law changes for 1099-Ks reporting
Do you work with a third-party service to process payments? You’ll want to understand how this change affects you now—and when you file next year.
- Under previous law, the third-party service had to meet a higher bar before being required to send you Form 1099-K. The old rule was the form was issued if you had more than $20,000 in gross payments and/or more than 200 transactions throughout a tax year.
- Starting in 2022, you will receive Form 1099-K if a third-party processes anything more than $600 worth of payments—regardless of the number of payments or transactions you have within the tax year. The lower threshold means more people will receive a 1099-K.
Why tell you about next year’s taxes now? Simply stated, you’ll want to stay ahead of your tax liability as the year progresses to avoid penalties when you file next year. To do so, you should consider making or adjusting estimated tax payments each quarter in 2022.
Need help figuring out how much to pay? Consider adding our Quarterly Tax Payment Service to your tax prep.
9 – Looking forward: Bonus depreciation declines after 2022
Are you considering purchasing equipment for your company in the coming this year or next? You’ll want to understand the tax implications around deducting qualifying property.
A tax benefit called bonus depreciation allows your business to take an immediate first-year deduction on the purchase of eligible business property, in addition to the asset’s regular depreciation schedule.
The Tax Cut and Jobs Act (TCJA) includes a provision for bonus depreciation that allows a deduction for 100% of the purchase price of qualifying property. After tax year 2022, the bonus depreciation rate will be reduced annually:
- 100% in 2022
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
Tax law changes in 2022 for individual filers
1 – Child Tax Credit
The Child Tax Credit was expanded in 2021 to provide more money for more families. With the change, up to half of the credit was paid as advance payments throughout 2021, while the other part can be claimed when you file your 2021 tax return, in 2022.
This is the first time the IRS sent advance payments for the Child Tax Credit, so you can expect some changes in how you file. You’ll need to report the advance amount on your 2021 returns in order to claim the remainder of your credit.
To make sure your individual return is accurate and to avoid delays, you’ll want to keep an eye out for Letter 6419. The IRS will send this document to you in January to record your advance payment amount.
If you opted out or didn’t receive the advance, you’ll be able to claim the credit due to you when you file your 2021 return.
2 – Stimulus payments and Recovery Rebate Credits
Did you receive a stimulus payment in 2021? The process for reporting stimulus payments is different than it was for the first two stimulus payments. What’s new this year is the IRS will send Letter 6475 in January. This document will show the amount you received for 2021.
To avoid lengthy tax refund delays, you’ll want to use the amounts shown on your Letter 6475 to accurately report your payment.
If you qualify and didn’t get the full amount, you can claim a Recovery Rebate Credit to get the money you deserve.
Get help with tax law changes in 2022
Taxes can be complicated, especially when you’re a small business owner or self-employed. Luckily, we’re ready to help you with all of your small business tax questions and make your tax filing easy.