Preparing for 2022

By James N. Lopiccolo, originally featured in SBAM’s FOCUS magazine
Revised 1.17.2022

By all accounts 2022 was supposed to be a quiet year for tax law changes, but that is never the case. Even with legislation up in the air in Washington, D.C., there are still plenty of considerations for businesses to address as we start the new year.

Standard Deduction increases to $25,900 (married filing joint), $12,950 (single), and $19,400 (head of household).

Next year taxpayers can put an extra $1,000 into their 401(k) plans. The IRS recently announced that the 2022 contribution limit for 401(k) plans will increase to $20,500. The agency also announced cost‑of‑living adjustments that may affect pension plan and other retirement-related savings next year.

The amount an employee contributes from their salary to a SIMPLE IRA cannot exceed $14,000 in 2022 ($13,500 in 2020 and 2021; $13,000 in 2019 and $12,500 in 2015 – 2018).

Health Savings Account contributions increase to $7,400 (married) and $4,950 (single).

Single year gifting limits will increase from $15,000 to $16,000.

As we begin 2022, a lot of companies will start purging old records to make room for new. This is a perfect time for businesses to evaluate their record retention policy. A general recommendation for most records retention is seven years. However, some records, such as employee personnel records should be kept for 3-5 years after employee termination.

Other documents like property basis records and organizational documents should be kept permanently. As always, consult with your legal and tax advisors before making any changes.

There are many benefits of converting your business’s tax status from a sole proprietorship or partnership to an S-Corporation. Usually just before the end of the year is the best time to talk with your tax professional about the conversion effective January 1.

However, as a general rule, most businesses have 75 days from the effective date to file the necessary election and related paperwork. For example, if you wanted to make your election effective January 1, 2022, you would have until March 15, 2022 to file the necessary paperwork with the IRS. A newly formed entity can make this election by simply filing IRS form 2553 (Election by a Small Business Corporation).

Other entities may have to first file form 8832 (Entity Classification Election) and form 2553 by the deadline. So, if you are thinking about becoming an S-Corporation, you still have time. Again, I recommend discussing this with your tax professional.

While October and November are the ideal months to put together a budget for the upcoming year, January and February still mark a good time to add those finishing touches and tweaks. Budgets can be broken down by month, and having a full twelve-month history helps develop estimates.

By creating a budget, you can see how costs can be reduced, resources are properly allocated and new goals can be set for the year ahead. A good budget should be dynamic in nature, allowing for flexibility and changes in business conditions, and should also be realistic.

State corporate law and the corporation’s own bylaws set the rules by which a corporation holds valid meetings, takes valid corporate actions and keeps corporate minutes. An organization’s legal standing as a corporation is risked if a corporation fails to hold corporate meetings documented by the corporation’s minutes.

LLCs treated as an S-corporation are generally not required to hold annual meetings, but you may have to review your operating agreement to see if there is a requirement to hold a meeting. Keep in mind that one of the first things an IRS auditor will ask for is a record of the corporate books and records to verify decisions made, so regardless, it is typically a good idea to have at least one annual meeting.

General requirements of all meetings are:

Having an annual meeting whether or not your business is a corporation or LLC helps demonstrate that the entity is being treated as a separate legal entity and helps maintain the “corporate veil” that protects the owners against business liabilities.

Although last year is now over, you still need to finish the year by completing your tax return for last year. Providing your tax preparer an organized set of books and records not only makes the process easier, it should save you money on preparation fees.

If you use an accounting system, make sure your bank account and credit card accounts are reconciled and agree to the end of year statements. Review your accounts receivable and payable schedules for any obsolete or incorrect balances, review your profit and loss statements to make sure expenses are categorized correctly, and finally, make sure you provide all of your information to your tax preparer early enough to meet the tax deadline.

The beginning of the year is the perfect time to consider moving your business to a new accounting system or upgrading from a desktop to a cloud-based accounting system.

If you don’t like how your current system is working, think about starting fresh right now. Simply use last year’s closing balances as this year’s opening balances and begin recording the current year transactions. You can keep your history on the old accounting system or make a back-up to refer to, if needed. A great thing about some of the newer systems is that they allow you to put your opening balances in at any time during the year, so you don’t have to wait for the prior year accounting to be completed. Just because the new year has already begun, don’t think that you can’t make changes to your systems, tax status or processes. Now is the time to hit the ground running to create your best year yet.

James N. Lopicollo (Jamie), CPA, is the proud founder and managing member of the CPA firm, Capocore Professional Advisors, located in downtown Lake Orion. Jamie leads the firm’s advisory practice, providing a proactive approach to serving the firm’s business and individual clients. In 2020, Jamie was named Lake Orion Business Person of the Year and was awarded the MICPA Public Service Award for 2021.