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If your business doesn’t already have a retirement plan, now might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions.
For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for 2022. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000).
More options
Other small business retirement plan options include:
401(k) plans, which can even be set up for just one person (also called solo 401(k)s),
Defined benefit pension plans, and
SIMPLE-IRAs.
Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
Deadlines to establish and contribute
Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.
Important: The SECURE Act provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.
For example, the deadline for the 2021 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 17, 2022, if you extend your 2021 tax return. The deadline for making the contribution for the 2021 tax year is also October 17, 2022. However, to make a SIMPLE-IRA contribution for the 2021 tax year, you must have set up the plan by October 1, 2021. So, it’s too late to set up a plan for last year.
While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan alternatives. Be aware that, if your business has employees, you may have to make contributions for them, too.
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Do you operate a small business as a sole proprietor? There are many tax rules and considerations involved in operating this way. For example, you may qualify for the pass-through deduction on qualified business income. You must pay self-employment tax and make estimated tax payments on income earned. You can deduct health insurance costs as a business expense. If you hire employees, you need a taxpayer ID number and must withhold and pay employment taxes. Keep complete records of income and expenses. Also, consider setting up a qualified retirement plan. Contact us if you want more information about the tax aspects of your business, or if you have questions about recordkeeping requirements.

Did you download our Cashflow tipsheet? This free resource will teach you what you need to know to keep your cash flowing.

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Cash Management - Dapasco Corporation Download our Small Business Cash Management Tipsheet We’ve put together a list of 10 easy cashflow management tips that can help your business more effectively meet operating expenses and invest in its future growth. Just fill in the short form below and you’ll gain access to this valuable resou...

Are you launching a business or thinking about changing your existing business entity? You’ll need to determine which entity works best for you: a C corporation or a pass-through entity such as a sole proprietorship, partnership, LLC or S corporation. There are many factors to consider. Proposed federal tax law changes may affect your decision. The corporate federal income tax is currently imposed at a flat 21%, while individual federal income tax rates go up to 37%. The rate difference may be mitigated by the qualified business income deduction available to eligible pass-through entity owners that are individuals, estates and trusts. Questions about your situation? Consult with us.

Businesses must keep records of their income and expenses. Carefully record them in order to claim the full amount of tax deductions to which you’re entitled. You also want to make sure you can defend the amounts on your tax returns if you’re ever audited by the IRS. Certain expenses, such as automobile, travel, meals and home office expenses, require special attention because they’re subject to special recordkeeping requirements or limits on deductibility. Contact us if you need assistance retaining adequate business records. By taking a painstaking approach to how you keep records, you can protect deductions and help make an audit much less difficult.

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Here's a great resource from AARP on avoiding scam tax preparers. Tax fraud is always an issues this time of year, but given our extraordinary circumstances, tax schemes are more popular than ever. If your business needs expert tax guidance and preparation, please contact Dapasco Corporation for a free consultation.

https://www.aarp.org/money/scams-fraud/info-2021/avoiding-scam-tax-preparers.html

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