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5 Year-End Tax Planning Strategies for Small Businesses in 2020

5 Year-End Tax Planning Strategies for Small Businesses in 2020

November 12, 2020

If you’re a small business owner, there are still plenty of ways to reduce your federal income tax bills before the end of 2020. Here at Cambaliza McGee LLP, we are dedicated to helping small businesses save valuable money so they can achieve their goals. In this article, we’ll be talking about 5 tax planning strategies to maximize your earnings in 2020!

1. Anticipate Your Personal 2021 Tax Bracket

It’s important to remember that your shares of your business’s income and deductions will be taxed at your own personal rate if your business is a pass-through entity. This includes sole proprietorship, partnership, S corporation, or LLC. Unless there are rapid changes made within the next few months, the tax brackets for next year will be the same as this year with some adjustment for inflation.

This is when you need to anticipate what your 2021 tax bracket will be. If you’re anticipating that you’ll be in the same or lower tax bracket next year, you’ll want to defer income into the next year and accelerate any deductible expenditures into 2020. This will postpone some of your tax bill to 2021, when you’d be expected to pay fewer taxes on your income.

However, if you know that you’ll likely be in a higher tax bracket next year, you need to do the exact opposite. Any income that could be moved into this year should be accelerated, while any deductible expenditures should wait until next year. This strategy will allow you to pay fewer taxes this year than you will as part of a higher bracket.

2. Assess Bonus Depreciation for Any Assets Added in 2020

If you’ve acquired any new or used property this year, it may qualify for a 100% first-year bonus depreciation as part of the Tax Cuts and Jobs Act. In other words, your business can write off the cost of any asset acquisitions made in 2020 on this year’s tax return.

This can get tricky when you need to weigh the immediate gratification of first-year write-offs against possible future-year depreciation write-offs. If tax rates increase over the next few years, it may be more financially lucrative to depreciate your current year assets over time rather than immediately.

The professionals at Cambaliza McGee LLP can help you evaluate which of your assets qualify for this depreciation and whether or not it would be a good idea to pursue a bonus depreciation this year. If it does make sense for you to claim the first-year bonus depreciation, you should aim to make any additional planned acquisitions between now and the end of the year so they can be part of the write-off as well.

3. Consider Postponing Taxable Income

Just as we mentioned anticipating your personal tax bracket in 2021, you must also consider the rate that your business itself will be taxed next year. If you think your business’s income will be subject to the same or lower rate next year, you’ll want to postpone some taxable income. Most small businesses are eligible to use cash-method accounting to plan their taxes over the next two years, and there are a few strategies that can defer your business’s taxable income:

  1. Prepay some of your expenses. If the economic benefits of these prepayments don’t extend beyond the end of the next tax year or 12 months after your business receives benefits from the payment, you can deduct prepaid expenses made this year.
  2. Use credit cards to charge recurring expenses that would generally be paid early in the next year. This will allow you to claim 2020 deductions despite paying the credit card bills in 2021.
  3. Mail checks near the end of the year so they’ll be received in 2021. You’re allowed to deduct expenses in the year you mail the check, so make sure you can prove your checks were mailed before the end of the year.
  4. Wait until closer to the end of the year to send invoices to your clients. You don’t have to report income until you receive the payment, so you can defer that income to 2021.

These rules apply if you anticipate that your business will belong to the same or lower tax bracket next year. If you’ll be paying a higher tax rate in 2021, do the opposite of the strategies listed above. Postpone your expenses and move possible new income into this year.

4. Create a Smart Retirement Plan

Even if your business is newer, it’s never too early to start considering your options for retirement. As they currently stand, retirement plans offer significant deductible contributions. Some of these options include a SEP-IRA, a 401(k) plan, a SIMPLE-IRA, and a defined benefit pension plan.

Many of these options will require establishment by the end of the year if you want to make deductible contributions for 2020. Others can wait until next year if you defer your 2020 federal income tax return. Our accountants at Cambaliza McGee LLP can help you determine which retirement plan fits your business best and when you need to set it up.

5. Optimize the Deduction on Qualified Business Income

If your business is a pass-through entity, you may be eligible for up to a 20% deduction on your qualified business income, real estate investment trust dividends, and income from publicly traded partnerships. These deductions can only be made by noncorporate taxpayers such as trusts, estates, and individuals.

There are some restrictions that apply for higher income levels or the owner’s taxable income, but you can consult our accountants if you have any questions or concerns.

Strategize and Save Money for your Small Business

Knowing all your tax planning options is key in ensuring your small business is capitalizing on important money-saving techniques. The experienced accountants at Cambaliza McGee LLP understand that tax planning can be a complicated and time-consuming process, which is why we offer multiple services to assist you in navigating these intricacies. Reach out to us for help any time by calling 949-484-8288 or emailing contact@cpa-ltc.com. We’re happy to help you with any of your tax planning needs.

Author: CM Editorial