6 Year-End Business Tax Planning Moves
Originally published on November 27, 2019
Updated on August 16th, 2022
You might be winding down the calendar year, but tax season is just about to begin. That makes it the perfect time to look at your company’s tax strategy. The right business tax planning moves now can save a sizeable amount on your 2019 return.
Move #1: Consider using a credit card to pay for deductible expenses before the end of the year
Looking to buy new furniture for your office? How about a software program to help with your marketing efforts? If you’re a cash basis taxpayer, considering a tax-deductible purchase, make it before the end of the year so it can apply to your 2019 return. And by using your credit card, you won’t affect your cash flow and can be deducted in 2019. Just remember that whatever you purchase must be placed in service before year end.
Move #2: Take advantage of the qualified business income (QBI) deduction.
We can’t emphasize it enough. If your business isn’t a C corporation and is a qualified trade or business, take advantage of the QBI deduction. Also called the 199-A, it allows you to deduct as much as 20% of taxable income you receive from a pass-through business.
You can achieve a significant savings using this deduction by deferring income or accelerating deductions. This can help you fall under the dollar thresholds that limit how much you can deduct under QBI.
Move #3: Reevaluate your accounting method.
If you operate a small business that uses the accrual method of accounting, you might want to make a switch. Cash method accounting recognizes revenue and expenses when payment changes hands (instead of when billed or earned).
This method allows you to shift income to another tax year by changing how you bill or pay for things. For example, you could wait to bill for services until next year or prepay now for a future expense. (There are some restrictions; for example, you can’t pay two years’ rent in advance.) This could also help defer tax if your accounts receivable generally exceed the balance of your accounts payable.
To qualify for cash accounting as a small business, your company’s annual gross receipts must fall under a certain level. While this level changes each year, the average limit over the past three years is $26 million. If this describes your venture, it could be a great year-end business tax planning move to adopt this accounting method.
Move #4: Take advantage accelerated depreciation guidance from the Tax Cuts and Jobs Act.
Did you buy machinery or other equipment and place it in service this year? (Or do you plan such a purchase before year end?) If so, you might be able to claim a 100% first-year depreciation deduction. This TCJA provision allows a business to take this deduction under certain circumstances, even if the asset is in service for just a few days of this tax year.
Additionally, the de minimis safe harbor election allows you to deduct smaller expenses if they don’t fall under uniform capitalization rules. The cost of a unit of property cannot exceed $5,000 ($2,500 if there is no applicable financial statement). If you’ve made such smaller purchases, or plan to do so, this is another potential area of savings.
Move #5: Beware of net operating loss (NOL) deductions.
The new tax law no longer allows you to carryback a net operating loss. For losses you take in taxable years, you can deduct up to 80% of your taxable income. It may be advantageous to defer expenses or income to eliminate being caught by the new NOL rules.
These rules can be very confusing. If you have a loss for the year, consult your CPA to determine if you are subject to these limitations.
Move #6: Consider establishing a retirement plan for yourself and your employees before year end.
Believe it or not, you still have time to provide tax-deferred retirement options for your staff. If you do so before the end of the tax year, deductible contributions for 2019 may qualify to be made as late as the extended return due date for 2019. There are several types of plans that can work for small businesses, so choose one that best fits your company’s needs.
Though you’re busy wrapping up your work year, finding time to strategize can pay off on your return. And seeking expert advice is probably the best business tax planning move you can make. So check with your business tax CPAs to see if these and other year-end moves are right for your company.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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