10 Tax Planning Tips That You Should Implement for your Business Before Year-End
Are you familiar with the feeling of finding yourself with a huge tax balance and wondering, "Was there really nothing I could have done about this?" Well, now is your time to act! Read on for tax saving strategies to implement before 2021 comes to a close.
Year-end tax planning is the practice of trying to maximize tax returns, avoiding tax penalties, and make the most of any possible tax deductions. Tax planning reduces your tax liability by employing effective strategies that explore ways that not only decrease taxes, but in some cases, secure a more solid future and retirement. Whether you earn $50,000 annually or $500,000: proper tax planning can be beneficial for everyone.
There are a number of tax strategies out there that can help reduce your tax balance. Following is a brief guide on some options that you can benefit from:
1. Electing to be Treated as an S-Corporation
- If your business is currently a C Corporation you may want to consider switching to an S Corporation. Although a C Corporation is taxed at 21%, which may be less than your personal tax bracket, you will be paying taxes again when the corporation issues dividends. With an S Corp,, you generally do not pay taxes on distributions, plus you can use your personal deductions to offset your tax balance.
- While on the topic of S Corporation - now is a good time to review whether you are taking out a reasonable salary as required by the IRS.
2. Health Insurance Expense
- Employers can offer company health insurance where the employees can choose to opt-in. They will get a pretax deduction on their paycheck and the employer pays a portion of the cost as a business expense.
- Self-employed individuals can deduct their insurance expenses on their personal tax return.
- Cash basis filers calculate income based on when they actually receive the money or when the money leaves your account.
- Review and pay your open bills. This can be beneficial since you will pick up on the expenses for this year.
- Prepay expenses up to 12 months, using the IRS Safe Harbor for up to 12 months. Take into consideration lease payments, rent, insurance premiums, etc.
- Stop billing customers - If possible try to push off getting paid in December and wait for January. (Make sure to only use it with clients that you know are going to pay you)
- Be aware of "Constructive Receipt" - this applies when a business has access to utilize the funds that are received for goods and services despite the funds being physically received or deposited. In this case, you will need to pay taxes on the income.
- An accrual basis filer will calculate income based on the date of the invoice or bill. Therefore, it's important to make sure that all bills are entered and dated correctly so the expense can be picked up.
5. Use Your Credit Cards to Pay Expenses
- Do you have business expenses that need to be paid but don't have the available funds in your bank? Use your credit card. Using your credit card prior to year-end will allow you to use those expenses even if your credit card balance is unpaid. This works with cash basis filers as well.
- Do you have old computers in the office that needed to be replaced for a while but have been pushing it off? Now is a good time to buy them! The IRS allows businesses to take an immediate deduction, by taking the "bonus deprecation" and making the "section 179" election, for business expenditures related to some depreciable assets. This allows a business to lower its current year tax balance rather than depreciating it over time.
- In order to utilize this bonus depreciation, it needs to be placed in service before year-end.
- Want to learn more about claiming your car as a business expense? Read this post.
- If you occasionally have your kids working for you, you may want to consider adding them to payroll. They will not pay federal income taxes on the first $12,550, and state taxes will most likely be very low. In turn, this will save you income taxes on $12,550.
- If you are a sole proprietor, or you and your wife have a partnership you can save even more taxes. If your kids are minors you and your kids won't need to pay social security and Medicare taxes which will save you an additional 15.3%.
- Check this article to learn more.
- If you are a real estate professional you can use your rental losses against your active income. To qualify as a non-passive real estate professional you will need to have a log of 750 hours per year.
- Once you satisfy the real estate professional test, you will need to determine if the taxpayer is materially participating in rental activity. This will turn your rental property from passive to non-passive. To be considered materially participating, you need to spend more than half of your time working with rental properties.
- The QBI deduction allows you to deduct 20% of your taxable income, however, this will get phased out based on your income. ($329,800 for joint filers in 2021). Once you reach the threshold, your ability to claim the pass-through deduction gets limited by 50% of payroll and you might not get to enjoy the full 20% tax break. Therefore, in order to qualify based on payroll, you should increase your wages.
- The formula of wage increase for QBI is as follows: take the business net income > add back payroll > calculate it by .285 and you'll get the total wages to maximize on QBI. Note that if there are any losses on the personal tax return which would decrease the AGI the QBI will be calculated on the lesser of business income or AGI. But this is a good start.
- Pensions are a great way to put away money for retirement and have a business expense. You can invest the money from the pension and since it's tax-deferred, the money grows faster as there isn't anything eating away at it.
- Check this blog post for a summary of how a pension can help you save on taxes.
Looking for more tax savings tips? In this article, we discussed more tips that you can implement on a personal level.
Disclaimer: This article was written in an oversimplified manner designed to help you as a business owner. You should discuss this with a tax professional prior to implementing these strategies.