A number of end-of-year tax planning strategies are available to business owners to reduce their tax liability. Here”™s a look at some of them:
Deferring income
Businesses using the cash method of accounting can defer income into 2022 by delaying end-of-year invoices so that payment is not received until 2023. Businesses using the accrual method can defer income by postponing the delivery of goods or services until January 2022.
Purchase new business equipment
- Bonus d Businesses are allowed to immediately deduct 100% of the cost of eligible property such as machinery and equipment that is placed in service after Sept. 27, 2017 and before Jan. 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
The first-year 100% bonus depreciation deduction is available for qualifying assets even if they are placed in service for only a few days in 2021.
- Section 179 e Businesses should take advantage of Section 179 expensing this year whenever possible. In 2021, businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $1.05 million of the first $2.62 million of property placed in service by Dec. 31, 2021. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar-for-dollar on amounts exceeding the $2.62 million threshold and eliminated above amounts exceeding $3.67 million.
Computer or peripheral equipment placed in service after Dec. 31, 2017 are not included in listed property.
Small-business health care tax credit
Small business employers with 25 or fewer full-time-equivalent employees with average annual wages of $50,000 indexed for inflation (e.g., $56,000 in 2020) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50% (35% for nonprofits).
Repair regulations
Where possible, end-of-year repairs and expenses should be deducted immediately rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) can take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or invoice). Businesses with applicable financial statements can deduct $5,000. Small businesses with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance and improvements to eligible buildings.
Retirement plans
Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2021.
Dividend planning
Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
Paid family and medical leave credit
A business tax credit is available for employers providing paid family and medical leave to qualifying employees through 2025. Employers must have a written policy in place that meets certain requirements and other conditions. The credit, set to expire in 2020, was extended through 2025. It ranges from 12.5% to 25% of wages paid to qualifying employees for up to 12 weeks of family and medical leave per taxable year.
This column is for information only and is not advice. Taxes are complicated and mistakes can be costly. Consider consulting professionals regarding tax matters.
Norm Grill, CPA, is managing partner of Grill & Partners, LLC, certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203-254-3880.
