Tips for Year-End Tax Planning
Year-end tax planning is important for small business owners because it can reduce their income tax liability and allow them to keep more of the money they’ve earned. Here are a few strategies for tax planning that you can get a head start on to prepare for the next tax season.
According to the standard tax code, you’re required to depreciate your equipment over the time of its useful life. Bonus depreciation allows you to write off 100% of those costs on your 2021 return. However, a couple of things to keep in mind are 1) buildings and their structural components are not eligible and 2) the equipment must be “placed in service” meaning you must actually start using it before December 31st.
Manage Income and Expenses
Most small business owners use cash basis accounting for tax purposes which becomes beneficial when it comes to tax planning. The cash method allows you to recognize income when cash is received, and recognize expenses once they are paid. The goal for cash basis is to accelerate deductions and defer income. By doing so, you can lower your tax bill.
Here’s an example for expenses: you’re sending a handful of your employees to a conference in February 2022 and weren’t expecting to pay until January 2022. But you pay for the expenses in December 2021, you claim the expenses for 2021 and reduce your 2021 tax liability.
For income, let’s say you’re expecting payment from a client for a project in December 2021 this year, but you haven’t sent out the invoice yet. You can send the invoice in January 2022, receive payment in 2022, and not have to claim the income for 2021.
Lowering your taxable income enough may change your tax bracket, meaning you will owe less. It may also lower your self-employment tax.
Invest in Retirement
Setting up workplace retirement accounts comes with a few tax benefits from the SECURE Act that you may not know about. One is that small businesses may claim up to $5,000 of tax credit each year for three years to offset the set-up costs of the plan. Another benefit is a possible tax credit for the business of $500 per year for three years if the business includes an auto-enrollment feature in its plans. However, there are a few stipulations in order to qualify for the $5,000 credit. The business must have:
- 100 or fewer employees who received at least $5,000 in compensation during the prior year,
- At least one plan participant who isn’t a highly compensated employee, and
- A roster of employees who didn’t participate in a prior retirement plan offered by your business in the past three years
If you qualify for these credits, that’s $5,500 per year for three years!
BaCo Group and Tax Planning
Tax planning can be hard. Businesses and individuals are unique, and each tax situation is different. However, with the help of a CPA like those at BaCo Group, tax planning will be a breeze and your return will be easier than ever! We take pride in being able to help our clients with a tax plan for their businesses because we feel it’s important for the financial health of the business. Contact us to set up an appointment and start tax planning today.
Published on Oct 05 @ 9:15 AM CDT