Small Business Owners – Time is Running Out for Proactive Tax Planning
While 2021 taxes aren’t due for months, there are some moves that need to happen before the year’s end to minimize your tax liability. Ideally, your accountant should be reminding you every fall that it’s time to check in to review the financial activity of your business for the year so they can calculate a rough idea of your expected tax liability and discuss proactive tax planning strategies to mitigate the tax you might owe.
Contributing to a retirement account can be one of the best ways to take a big bite out of your tax bill.
As accountants like to say, “Would you rather write a check to the IRS or yourself?” There are a number of different types of retirement accounts, each with pros, cons, and varying costs to set up and maintain. There are even some plans that allow high earners to defer income on hundreds of thousands per year. Talk to your accountant to identify and set up the best plan for you.
Get Your Books in Order
You don’t want to wait until just before tax time to catch up on your bookkeeping. And if your accounting records are current, you and your accountant can likely find more deductions you can take. This is also an easy task to outsource. Some accounting firms like Emerald Financial offer bookkeeping support at a reasonable rate, so you can spend your time focused on the business functions that make you money. This also lets the accountant stay on the lookout for issues and opportunities as they process monthly transactions.
First-Year Bonus Depreciation
As a result of the Tax Cuts and Jobs Act (TCJA), you can now get a tax break for the entire cost of assets purchased in 2021, instead of parsing out depreciation over multiple years. If you are on track to have a high income this year, you can consider making more planned purchases before the end of the year to reduce your tax liability with equipment expenses.
Can You Claim the Home Office Tax Deduction?
Since the pandemic started, many business owners started working from home and may be eligible for the home office deduction. This deduction can be worth healthy tax savings, but it can be tricky to make sure you legitimately qualify. Definitely review this with your accountant – the savings can be well worth it.
Manage Your Income Year to Year
As a business owner, you have control over some of your income, expenses, and deductions. You can push some items into this year or delay them to the following year depending on which is most advantageous for your tax situation. Consider whether you expect to have higher income or lower income next year. The idea is to push income into the lower-income year and move expenses and deductions into the higher-income year. If major changes to the tax brackets are anticipated, they would impact this strategy.
While each of these issues makes sense individually, when you bring all the moving parts together, it does become complicated to plan which strategies will best minimize your tax liability. Helping you navigate these decisions is how good small business accountants earn their keep. Contact Emerald Financial if you could use a more proactive tax planning and accounting partner that understands small businesses and works hard to help you keep as much money you earn as you legally can!