Coping With Uncertainty

With the snow removal and ice management operation’s 2021 taxes finished or postponed until later, it’s time to think about the new ballgame that is the 2022 taxes.  Oh, sure, the controversial Build Better Act bill may or may not emerge to foil any planned tax savings.  But, far more certain, are the many changes and new taxes to be faced in 2022.

There are various changes affecting employment taxes, especially the status of independent contractors, coping with worker shortages and business meal and entertainment deductions for 2022, as well as new reporting requirements for digital assets such as cryptocurrencies that all take effect in 2022.

LOOKING BACK BUT ACTING IN 2022
Many of the potential tax savings -– and currently misunderstood or neglected -– law provisions were already on the books. 

Consider the following options:

PAYROLL TAX DEFERMENT:  The Coronavirus Aid, Relief and Economic Security (CARES) Act allowed employers to defer deposits and payments of their share of Social Security taxes from March 27 through Dec. 31, 2020.  While 50% of those deferred amounts were required to be deposited by Dec.31, 2021, any remaining amount must be deposited by Jan. 3, 2023.

DEDUCTING BUSINESS MEALS:  Tax deductions for travel and entertainment expenses seemingly change every year.  Aimed at helping beleaguered restaurants that continue to suffer, a business can take clients and customers, potential or existing, to lunch or dinner at the expense of Uncle Sam. That’s right, 100% of the cost of business meals, for 2021 and 2022, instead of the usual 50%, are tax-deductible.  This deduction applies to employees traveling on business although it must be for food or drinks provided by a restaurant.

GOING THE EXTRA MILE:  The standard mileage rate used by so many snow removal professionals has been increased for the 2022 tax year.  Reflecting the higher price at the pumps, for 2022 the rate for vehicles, including passenger automobiles, vans, pickups and panel trucks, is 58.5 cents per mile when used for business purposes.  Plus, of course, any related tolls and parking fees to these amounts,   Keep in mind that if there are more than five vehicles used for business purposes the standard mileage deduction won’t work.

DANGER AHEAD WITH PAYROLLS
The deferment of payroll taxes isn’t the only potential problem many snow removal professionals will face in the months ahead. 

Consider the following options:

INDEPENDENT CONTRACTORS:  The controversy over who is and isn’t an independent contractor continues in 2022.  Under our federal tax law, independent contractors are self-employed individuals who are responsible for their own tax filings and payments.  Independent contractors pay both income and self-employment taxes on their earnings.
Employers are required to withhold income taxes, Social Security and unemployment taxes from employees.  Employees will receive Forms W-2 from their employer showing wages and withholdings for the year.  
Making it easier for the IRS to track those using or claiming independent contractor status, instead of reporting compensation for independent contractors on Form 1099-MISC, Miscellaneous Income introduced for the 2021 tax year, a new form, Form 1099-NEC, Nonemployee Compensation, will, presumably, allow the IRS to better track independent contractors.
Now is the time to ensure that independent contractors used by the snow removal and ice management business and those calling themselves independent contractors really are.  Fortunately, the IRS has a form, Form SS-8, that either workers or an employer can fill out to obtain an IRS determination on worker status.

SIGN-ON BONUSES TO ATTRACT NEEDED WORKERS: So-called “signing bonuses,” just like those we’re familiar with in professional sports, are becoming more and more common in industry.  A signing bonus is money a snow removal business gives an employee who has accepted their job offer.  While that bonus is usually in addition to the employee’s salary, benefits and other bonus or commission opportunities, it shouldn’t be paid all up front.  After all, should the worker leave early, recovering the money will be difficult.
From a payroll tax angle, when the snow removal operation pays a signing bonus -– or any bonus -– they are considered to be so-called “supplemental” income and require a higher withholding rate.  Bonuses are not considered deductible expenses for sole proprietorships, partnerships or limited liability companies (LLCs) because the owners/partners/members are considered to be self-employed.

WORK-OPPORTUNITY TAX CREDIT:  The Work Opportunity Tax Credit (WOTC), is a tax credit (not a deduction but, rather a direct reduction of the operation’s tax bill) is available to employers hiring individuals from targeted groups who have faced significant barriers in employment.  The credit amount for the WOTC can be up to $9,600 for each qualified new hire, depending on the targeted group the new hire is drawn from.  The WOTC has been extended through 2025.

THE WAY YOU DO BUSINESS
Many professional snow and ice managers, along with small business owners,  recently discovered -– or will soon discover -– that should they face an IRS audit, even seemingly common business deductions have a dark side. 

Consider the following restrictions in the months ahead:

LIKE-KIND EXCHANGES:   Generally, a like-kind or “1031” exchange is a swamp of one property or piece of equipment for another.  The capital gain tax is deferred, not eliminated.  But, a like-kind exchange allows the seller to defer their depreciation recapture—sometimes.
If not properly structured and the properties involved don’t qualify as “like-kind” under the tax rules, the transaction can trigger a profit known as “depreciation recapture,” which is taxed as ordinary income.  Beware too, lawmakers and the White House have proposed, but not yet passed, limits on like-kind exchange deferral amounts.  One factor in those proposed plans would allow these tax-free swaps but exclude some personal and intangible property.
RELATED-PARTY TRANSACTIONS: All-too-often unsuspecting snow removal professionals find themselves facing penalties, fines and substantial tax bills because the ever-vigilant IRS has ignored a past transaction it views as having been conducted by “related persons.”  Below market rate loans, sales of property, installment sales, like-kind exchanges, inter-company transactions, etc. all may suffer from special tax treatment.  And, the IRS defines “related” parties not only as family members but owner or shareholder related to the business as can be friends, officers, suppliers, etc.

Our tax laws may change and the IRS impose new rules and/or limit write-offs.  However, one thing that will never change is the importance of tax planning.  Substantial tax savings are possible with planning, especially planning not at year’s end but during the course of the year as the snow removal and ice management business operates.
 
Mark E. Battersby is Snow Magazine's finance and accounting writer. He resides in Ardmore, Pa.