7 Tips for End-of-Year Business Tax Savings

With the end of the year approaching, small businesses should look at their current tax situation and possibly take action to minimize tax liability in this or next year. There is no need to send money to the government if you can make a few changes or change when you take income or pay expenses and reduce your tax liability. Here are seven things to consider in your end of year tax planning.

Tip #1: Give to Charity

If you have a tax liability, it is a great time to accomplish several good things. Save some on your taxes of course. Build good will in your market area with charitable contributions, especially going into the holiday season. Lastly, support worthy causes, especially those that help the less fortunate in your area.

Tip #2: Accelerate Expenses & Defer Income

This is a strategy for the business that wishes to reduce taxable income for the current year. When possible, pre-pay some expenses. Perhaps you can accelerate orders for materials or office supplies that you would be buying early in the next year anyway. If you have plans for a business trip or conference early next year, you may want to pay registration fees or other expenses early.

When it comes to income, perhaps you can defer some invoicing or billing of customers into the next year if it is not a problem for current cash flow. Especially for good repeat customers paying on terms, you may offer an end of year special deferral into next tax year of money owed. Another way to accomplish this is to delay the invoicing of good customers such that their normal payment terms would move payment into next year.

Tip #3: Accelerate Income & Defer Expenses

This is the flipside of tip number two. You are having a slower year, perhaps due to recent pandemic shutdowns or restrictions. You have low tax exposure, but things are beginning to improve. It looks like next year is going to be better.

Anticipating higher income next year, you may want to offer some early payment incentives to customers to accelerate their payments into this tax year. Moving that income into this year when your tax exposure is low will help with current cash flow while lowering taxable income next year.

Tip #4: Check Your Business Type and Tax Treatment

This is one that will require consulting with your tax professional. Notably, changing into or out of a pass-through business structure is one possibility. With special deductions, such as a possible deduction of 20% of qualified business income, changing to a pass-through business type may be a good decision.

On the other side of that, the Tax Cuts and Jobs Act cut the C Corporation tax rate to 21%. Owners in a pass-through structure may find that switching to a C Corporation, if possible, could save a lot in taxes as well as provide other benefits related to retained income.

Tip #5: Contribute to or Set Up a Retirement Plan

With the many options available for tax saving retirement plans, business owners often find that they have not contributed as much as they are allowed in the current year. Whether an IRA, 401(k), Roth, or other retirement account, the tax breaks can be quite generous, so ending the year short of your allowable maximum contribution could be a tax mistake. There may also be tax credits available, so consult your tax professional.

Tip #6: Take Advantage of Equipment Purchase Deductions

If you buy new or used equipment for your company and place it in service before the end of the year, you could be entitled to a federal tax deduction of up to $1.02 million. Businesses can also take a 100% depreciation deduction of the cost of qualifying new or used equipment. If you have been considering the purchase of new equipment, it may be a good decision to do it before the end of the year.

Tip#7: Create or Check Your Plan for Paying Taxes

The end of the year is a good time to consider those quarterly tax payments, look at how you plan to put away the money to make tax payments on time, and how you’ll work that into your cash flow planning.

Though just seven tips, these can result in some amazing tax savings and more cash you get to keep. Give them a run-through to see where you stand.

Sources:

2021 year-end tax planning

and my own experience.

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