To begin, this article is by no means comprehensive. The number of new policies and tax changes happening on federal and state levels has grown exponentially in the last two years. My objectives here are to offer a few insights into the recent changes, propose ideas on taxes for business owners and show ways to directly benefit from IRS policy.
Remember, in my profession, I never get to answer questions with “yes” or “no.” Instead, I must say “it depends” very frequently. With that being the case, I will try to open your eyes to a few opportunities that are new or unknown.
QBID
Pass-through deductions, or qualified business income deductions (QBID), have had a higher limit since 2020. Why does it matter to you? You could write off 20% of your profit using this deduction as long as the right conditions are met.
While it is likely that the great majority of this publication’s readers have filed their 2020 tax returns — both business and personal — it may be a good idea to double-check your filing for a few items.
Back in 2018, the Tax Cuts and Jobs Act was passed and created the biggest shift in taxation since 1986. The main component of this change is to reduce taxes for pass-through entities, sole proprietors and potentially some owners of rental real estate.
There are numerous articles regarding the implementation of this strategy. For a carwash owner, whether the business is taxed as an S-Corp, Partnership or Sole Proprietorship, a QBID may be a possibility.
The difference between 2020 and 2021 is the upper limit where income would phase-out of the credit. Single filers may have up to $169,400 in total taxable income while joint filers may be eligible up to $329,800. That may only be $2,000 higher than before, but considering top tax rates, it can benefit some taxpayers up to 6% from his or her total tax rate.
So, as long as your income is below these numbers in question, you will have a sizeable deduction on your hands. This deduction is scheduled to phase out at the end of 2025, but could become permanent with recently submitted legislation.
Renewable energy
There are some renewable energy credits that will last through 2025, which are set for primary and secondary residences. This will not help the carwash business itself, but it can help a carwash owner who owns his or her home, and even a second home.
That credit is issued at the time of the tax filing and requires that the homeowner have solar panels installed. The cost of solar panels is high, so be sure to look before you leap because you are excited to save on taxes.
You will not find an income limit on this credit. Additionally, the credit will count on both new and existing buildings. The downside here is that you must spend money to save money. If you plan on relocating any time soon, I discourage the installation of expensive solar panels.
Alternative fuels
There is an alternative to hybrid cars and electric car credits; it is referred to as fuel credits. Specifically, this credit refers to hydrogen fuel, with little reference to natural gas engines.
Unfortunately, this credit is only available where hydrogen cars can operate. At the time of writing, there are hydrogen pumps in San Francisco and Los Angeles. I am sure automotive salespeople will be eager to share what they know on the credit but to save you time, here are a few specifics.
A vehicle may qualify for up to an $8,000 non-refundable tax credit. A non-refundable credit means that if you do not have a tax liability for the credit to mitigate, the credit will go to waste. The business or individual can qualify for this credit, meaning either entity can purchase the vehicle.
You do not need to worry about the car being too heavy because only compact cars are currently being made with this technology. Currently, only Honda, Hyundai and Toyota are making vehicles in this segment. Honda is exiting the market in 2023.
Donations
Make donations cool again by donating computers and equipment at fair market value, not thrift store value. I have heard of business owners for years donating goods to charities and not bothering to recognize the donation because it would have been insignificant. However, since the tax changes in 2020, donations of goods can be calculated at fair market value.
In my case, I had a cellphone I was no longer interested in using. In order to trade in the phone, the carrier would have given me $180. However, the current market rate for that phone in used condition was $500 — a difference of $320.
Without having to go through the trouble of selling the phone, I was able to donate it and capture that delta. This will be the case on your computers, cellphones and other electronics used at your business. Rather than writing those assets off as scrap, you can now drop them off at an electronics recycling station and they can help you again.
Research and development
The research and development credit has received some bad press recently for having been a target of IRS audit. The opinion of those defending those audits is “so what.” If you qualify for the research credit, take it. Regardless of audit, if you merit the deduction, take it.
Have a professional team working for you that can defend your taking of the credit. That is the end of the story. If you qualify, take the credit.
Qualifying for the research credit is not as complicated or challenging as you may anticipate. If you are running a carwash and developing an app for your customers or you are paying your employees to work on a better process or to improve chemical composition, there is a path for you.
However, there are some disqualifiers you should know about. If you have no employees, there is no way you will qualify for the credit. Equally, if you do not own the business, you will not qualify. A point of interest is that you will get credit for trying even if nothing results from the research and development.
If you have questions, please reach out to a competent professional that has experience in this area of tax.
Implementation
Like I stated at the beginning of this article, this is not an inclusive list. Each one of these strategies has merit and can be implemented in 2022 with correct planning. If you are questioning whether you may qualify or are looking for a way to qualify for these credits, get in touch with a legitimate professional.
You may have someone who prepared your taxes, but what you need is an advisor that changes your tax picture. Rather than an accountant that tells you “no” or “you do not qualify,” you may need an advisor that shows you the path to qualifying for new tax credits.
Possible tax changes
Regarding future tax changes, there is nothing set at this time. Many proposals have been floated and a hundred more tax bills have died before we get a chance to hear about them. With that said, the current administration has proposed a program called “Build Back Better.” Within this program, there are two elements that will affect a great deal of carwash owners.
The 3.8% Net Investment Income Tax (NIIT) may be applied to all active pass-through business income.
This will directly increase any tax paid on income derived from S-Corps and Partnerships.
This increase will not rule out the S-Corp and Partnership as attractive alternatives to Sole proprietorships and C-Corps. In order to understand the personal impact of this, please speak with your advisor.
All income above $10 million earned annually will be subject to an additional 5% taxation; for earned income greater than $25 million, an additional 3% will be imposed.
Currently, the graduated tax scale is the plan for the implementation of this tax.
Your first $10 million will not be subject to this additional 5% tax; likewise, the additional 3% will not kick in until you earn the first dollar after $25 million.
The Tax Cuts and Jobs Act changes will be made permanent. They were scheduled to expire in 2025.
This will preserve the 20% pass-through deduction. Regardless of an additional 3.8% NIIT.
Conclusion
There are many opportunities for business owners to improve their tax profiles year after year. This requires regular correspondence with an advisor that has your best interest at heart. If you are unsatisfied with the advice you have been given, get a second opinion from someone anxious to improve your tax picture.
In many cases, you can receive a free consultation from an advisor and sort out a plan that the two of you can implement throughout the year. In most cases, I suggest you pay for an accountant that is worth its fee. If you get a quote for a high fee, ask for an explanation on value — they may or may not be worth it. Take a moment to interview a few different accountants to find a best fit.
Red Rock Tax and Consulting Group is a solution-oriented firm. We suggest new methods on tax filings, deductions, credits, entity structure, changes in accounting practices, compensation models and even how frequently you talk to your advisor. We establish regular communication intervals, allow unlimited access to your advisor via emails and scheduled calls. Your goals are paramount to our interactions. We have more than 20 years in advising the automotive service industry. Reach out and together we’ll explore your path forward. For more information, call 435-635-2494 or visit www.redrocktax.com.
