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End-of-Year Tax Planning for Your Business

tax planning, end-of-year tax, accounting

If your fiscal year ends on December 31, it’s time to start planning for preparing for next year’s taxes. There are a few end-of-year tax planning strategies you can implement now that will help your business’s finances next year. While the below are trade suggestions, it’s recommended that you reach out to a tax professional before making any business decisions to see how it will impact your business. You don’t want to run into the situation where you implement one of the below in an effort to mitigate tax liabilities, and end up owing more to the IRS.

Deferring Income

Towards the end of the year, it’s helpful to defer income so it doesn’t show as income for the current year. If you use the cash method of accounting, delay sending any invoices so that payment on those invoices isn’t received until after January 1. If your business uses the accrual method of accounting, you can defer any income by postponing the delivery of services or goods until January 2021. Deferring income will help show that you’ve made less profit, and therefore you may not be taxed as heavily.

Purchase New Business Equipment

Businesses should take advantage of Section 179 expensing whenever possible. For the 2020 tax year, a business can expense 100% of new equipment costs – up to $1.04 million. If you’re taking advantage of this, keep in mind that any cost of equipment expensing cannot be more than your net taxable income.

Bonus depreciation allows a business to deduct 100% of the cost of equipment put in service between September 27, 2017 and January 1, 2023. After this time period, the depreciation value decreases over the next four years, being phased out in 2026.

Certain improvements to the property made after December 31, 2017 can be deducted, such as:

  1. Interior improvements that are not from the enlargement of the building, installation of any elevator or escalator, or the structural framework of the building.
  2. Installation of security systems, alarm systems, fire protection systems, roofs, or HVAC.

If you have any questions about what qualifies as a deductible building improvement expense, contact us today.

Time it Correctly

It’s not just what you purchase for your business, but when. Conventions are how you figure out how many months you can claim depreciation.

  1. The half-year convention – any property or equipment that you place in service is counted at the midpoint of the year. For example, if you buy a piece of equipment in December, you can get one-half year depreciation on it if the half-year convention applies.
  2. The mid-quarter convention – if the cost of the equipment is more than 40% of the total amount of property that you’ve placed in commission, you would use the mid-quarter convention and only claim depreciation at the midpoint of the quarter that you started using it.
  3. The mid-month conversion – you would use this only for property, and would only claim depreciation during the middle of the month that it was placed in service.

Other End-of-Year Tax Moves

Qualified Business Income Deduction

The qualified business income deduction is open to owners of businesses that are operating under partnerships, sole proprietorships, S Corporations, estates, or trusts that may be eligible. To qualify, your taxable income must be under $163,000 (or $326,000 if you’re filing jointly) if you want to take advantage of the deduction, which is worth up to 20% of your Qualified Business Income (QBI) for tax years 2018-2025.

Small Business Health Care Tax Credit

If your small business has 25 or fewer full-time equivalent employees, you may qualify for a tax credit that will assist you in the cost to pay for their health insurance. The credit is 50% of the insurance costs for for-profit businesses, and 35% for non-profits.

Business Energy Investment Tax Credits

Business energy investment tax credits can be taken advantage of until December 31, 2022. These credits consist of solar energy systems, geothermal electric, and large wind (this expires at the end of 2020) used to generate electricity, cool, heat, and provide hot water.

While hybrid solar lighting systems that use fiber-optic distributed sunlight to light a structure are eligible, solar pool heating systems and passive solar systems are excluded.

Repair Regulations

Any repairs that you make should be deducted immediately, and not capitalized and depreciated. Small businesses especially can take advantage of “de minimis” safe harbor for improvements, repairs, and maintenance to your building by deducting smaller purchases of $2,500 or less.

Depreciation Limitations on Vehicles

The tax reforms that were put in place changed depreciation limits for luxury passenger vehicles after December 31, 2017. If the bonus depreciation wasn’t claimed, the maximum deduction for the first year for 2020 is $10,100.

New and used vehicles that were purchased and put into service after September 27, 2017, and stays in service through the end of 2022, are eligible for the additional bonus, but the maximum first-year depreciation is $8,000.

Vans, SUVs, and pickup trucks that weigh more than 6,000 pounds are considered transportation equipment, and not passenger vehicles. Heavy vehicles qualify for a first-year bonus depreciation deduction of 100% if they’re placed into service between September 27, 2017 and January 1, 2023.

Retirement Plans

If you’re self-employed, and you haven’t set up a retirement account, you should do so before the end of 2020.

Dividend Planning

By issuing corporate dividends to shareholders, you can reduce any accumulated corporate earnings and profits.

Paid Family and Medical Leave Credit

The employer credit for paid family and medical leave is set to expire at the end of December, so it’s suggested that if you can, to take advantage of it.
Regardless of if you’ve already thought about your end-of-year tax situation, or this is the first time you’re contemplating it, we can help with any preparations you’ll need for the end of this fiscal year – and that includes preparing your business’s taxes next year, too – contact us today to find the best solution for your business accounting needs.

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