Your goal when preparing your tax returns is to get the IRS to owe you money. That will not always happen for business owners, but you can at least take steps to minimize your tax liabilities and maximize cash flow. There are some steps you can take as the year comes to an end. These will help you improve your 2021 tax situation while preparing for 2022’s tax year.
Here are six powerful business tax-deduction strategies you can easily understand and implement before the end of 2021:
The IRS regulations contain a safe harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment or change. Such qualifying expenses can include lease payments on business vehicles, office rent, machinery/equipment and insurance premiums. Safe harbor rules allow you to take the deduction this year, even if the expenses aren’t paid until next year.
This is a rock-solid year-end tax tip. Stop billing your customers. They generally won’t pay until they get the bill. This means you can hold off on collecting taxable income in 2021. If you don’t need the cash flow now, you can divert the income into 2022 and reduce your tax liabilities this year.
Bonus depreciation is currently at 100% and Section 179 offers increased limits for business expensing. It’s a smart idea to buy your equipment or machinery now and place it into service before December 31. This will enable you to deduct 100% of the cost in 2021. Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, office furniture and even some qualifying vehicles.
If you need to purchase office supplies and business necessities, consider using your credit card for these business expenses. This is a good tip for single-member LLCs and sole proprietors filing Schedule C tax returns. Credit card purchases count as tax-deductible on the day you make the purchase and put the item into use. Then, you can hold off on paying the credit cards as long as you need to. This way, you can get tax-deductible business supplies now, even if you don’t have the necessary cash flow available this year. Charge and pay it off later!
Please note this method can get more complicated if you use your personal credit card for corporate business expenses. The corporation would have to reimburse you before December 31 for either party to write off the expenses.
If your business expense deductions exceed your business income, you will have a tax loss for the year. With a few modifications, this loss is known as a “net operating loss” (NOL). This is often the case for new business owners. Under the Tax Cuts and Jobs Act (TCJA) of 2017, you are able to offset up to 80% of your taxable income in any one future year. This means you should never stop documenting your deductions. You should always claim every eligible business expense deduction available to you, even if it produces a tax loss.
The CARES Act fixed the qualified improvement property (QIP) error from the TCJA. QIP is any improvement made by the business taxpayer to the interior portion of a non-residential building (office, retail space, restaurant, etc.). QIP is not eligible for standard 39-year depreciation like real property. It is considered a 15-year property, which means it’s eligible for immediate deduction. You can use either the 100% bonus depreciation or Section 179 expensing. Just remember the qualified improvement property must be put into service on or before December 31 to qualify as a deduction for this year’s taxes.
These are a few useful year-end tax strategies that business owners can implement before 2021 comes to a close. For help with all your business planning and tax planning, count on the team at Illumination Wealth. Contact us today to learn more about our financial advisement services.