Year-End Tax Planning: 6 Tax-Reduction Tips for Business Owners

As a business owner, you should implement tax-reduction strategies that decrease your tax liabilities and maybe even net you a return. Either way, you are saving cash and increasing your potential profitability from year to year.

As 2022 comes to a close, there are six tax-reducing strategies you can use to reduce your business taxes for this year

1. Use the IRS Safe Harbor

IRS regulations contain a safe harbor rule. It allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment or change by the IRS. When using this safe harbor, your 2022 prepayments cannot go into 2023.

For a business owner who is a cash-basis taxpayer, qualifying expenses can include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

For example, let’s say your office rent is $3,000 a month. You can send a check at the very end of 2022 for all of 2023’s rent payments ($36,000 total). It is dated and mailed on December 30, 2022, which allows you to claim the full deduction amount for this tax year. Your landlord receives the check in January. They claim it as income for 2023 (the year when payment is received). The landlord gets guaranteed rent to cover all of next year without increasing this year’s taxable income. You get a huge business tax deduction with your rent prepayment.

2. Hold Off on Billing

A very common strategy is to hold off on billing customers until January. They generally won’t pay until they are billed, so you can hold off on receiving and claiming that taxable income until next year. It’s a tried and true method for reducing this year’s taxable income as a business owner, as long as you don’t need that cash before the end of the year.

3. Use Section 179 Expensing

If you are planning to buy office equipment or machinery, you can buy business assets and put them into place before December 31, 2022. This allows you to take advantage of 100% bonus depreciation and increased Section 179 limits currently in place. Examples of such purchases can include new and used equipment, computers, furniture and certain qualifying work vehicles.

4. Use Credit Cards

You can also use your business credit card(s) to make certain business purchases this year. This allows you to buy what you want/need in 2022, and you’ll be able to claim the tax deduction for this year (when the purchase was made). However, you can pay off the card later.

This strategy does get more complicated if you are a corporation owner and you use your personal credit card for a business purchase. You will have to be reimbursed by the company before you can claim the tax deduction. The tax deduction is only eligible as of the reimbursement date.

5. Take Advantage of All Business Losses

Take as many business tax deductions as you can. If your total deductions exceed your business income, you will have a tax loss for the year (otherwise known as a “net operating loss” or NOL). New businesses often have net losses, and even successful businesses can have NOLs in the eyes of the IRS if the deductions are legal.

The Tax Cuts and Jobs Act allows you to carry your NOL forward, and it can only offset 80% of your taxable income in any one future year. Always keep track of your tax deductions and always claim what you can, because these deductions may benefit you now or in future tax years.

6. Claim Qualified Improvement Property (QIP)

A QIP is any improvement you made to the interior portion of a building you own, provided it is non-residential real property. The improvement must be made after you place the building into service. QIP is not real property that you depreciate over 39 years. It is considered 15-year property, eligible for immediate deduction. You can use either 100% bonus depreciation or Section 179 expensing.

To be eligible for the QIP deduction in 2022, the improvements must be placed into service before the end of the year.

To learn more about any of these strategies and other year-end tax planning steps for business owners, contact Illumination Wealth today to schedule an introductory financial consultation.