Top 20 Year-End Planning Tips for Small Business Owners: Small Business Tax Planning Made Easy

Tax Planning

It’s the end of the year. Soon, you’ll be able to see how well your business did this year and create plans for the following months. In the final quarter of the year, it’s critical to have a plan in place to iron out your goals and to ensure you can properly observe just how well your company did. Small business tax planning is another big component of the end of the year – you need to be ready to submit your information to your accountant to ensure you meet all end-of-the-year requirements.

Note: Year-end tax planning for small business owners can often seem overwhelming and a lot of work, especially if you are working during a peak time for your business in the final quarter. Yet, there are a few things you can do now that may help to minimize financial frustration and create a better long-term outcome. 

Here are the top 20 strategies to put in place now.

#1: Stock Up and Pre-Pay

There are two simple steps here in one. Maximize all of the savings opportunities heading into the new year. For example, purchase the office supplies your company is likely to need now or inventory to sell. It’s also a good time to pre-pay any way you can, such as on your insurance, rent, or mortgage. Consider setting up and paying for services and subscriptions you use now as well. It’s going to reduce your tax obligations in the coming months and make the tough month of January a bit easier to manage. These are all costs you’ll likely still have and materials you need, but paying for them now may help reduce some of your costs later while giving you a bit of a tax break.

     Prepayments

#2: Determine the Proper Tax Treatment for Your Company

Now is a good time to make sure your business is getting the proper tax treatment. For example, some small business owners are able to deduct 20 percent of qualified business income when it comes to federal taxes. It comes from pass-throughs. A pass-through business is one in which the owner pays the necessary taxes on business income on their own. In other words, the business is not paying the taxes itself. There are limits on when this can be done – be sure to ask your tax accountant for any necessary clarification. Generally, it depends on the amount of taxable income the business has.

#3: Take Advantage of Tax Rules

2021 has been an interesting year for taxes. One thing you may notice is that there are a number of new small business tax deductions. These may help to reduce some of your costs – but be sure you qualify for them. For example, there are new temporary exceptions for meals expense deduction limits. That means that some companies may be able to deduct 50 percent of the cost of such meals while they deduct the full cost of ordinary and necessary expenses. Now, that’s been upped to 100 percent in some cases. That is definitely a savings for many organizations.

     Business Meals 

#4: Check Out the NOL Rules

Another important item to look at are the net operating loss rules. When your company’s deductible expense total is more than the taxable income you have, that leads to a net operating loss. No one wants to have that. However, there is some help if that is what you’re facing. A law put in place in 2017 eliminated the ability to carry back NOLs two years. Now, the CARES Act puts a break on that ruling, making it possible for you to carry this back as much as 5 years.

#5: Consider Establishing a 401K

While the end of the year is approaching, there may still be time to put in place a retirement plan for your employees. Doing this now, at the end of the year, may enable you to save money on your taxes. For example, set up a 401k or a Safe Harbor 401K for employees – and include yourself as well. This may help you to set aside money for retirement even if you do not have employees. You can then claim a tax credit for your company on the cost of both setting up the plan as well as administrating it. And, you can set aside money for yourself as a business expense.

#6: Lose Bad Debts

Many companies have bad debts or debts they can no longer collect on. You may try to continue to collect on them, but chances are good they will not be paid in the next few months or ever. One of the ways to reduce costs, then, is to write off these bad debts as uncollectible debt. Doing so before the end of the year may allow you to lower your profits, which in turn leads to fewer taxes levied against your business. To do this, be sure your accounts receivable are tracking your debts and handling any collection activities with ample accuracy. Run an accounts receivable aging report to pull up any debts that you need to get rid of. Add up all of these and write them off.

#7: Consider the Employee Retention Credit

The Employee Retention Credit may be one of the options for some companies to take advantage of this year. This new credit applies to those businesses that maintained workers on their payroll throughout the pandemic period. This credit is worth as much as half of the employee’s wages and health plan costs if the employee remains on payroll from March 13, 2020, through December 31, 2020. It also applies to 2021. There are numerous steps for qualifying, but companies that do may see a significant tax reduction from this credit.

#8: Talk About Taxes Paid

If you have not done so yet, it may be a good time to talk to your accountant about when you are paying taxes and how you are doing so. Most companies should be making estimated payments throughout the year. This can help to reduce the tax burden later. Most often, you can base estimated taxes on the prior year’s income. That can help you to preserve cash flow if this year you are seeing a bigger revenue stream (and may owe more). Be sure to set up a way to make these payments now, so you are not charged a fee later.

estimated tax

#9: Consider Equipment Deductions

Some companies may be investing in new equipment for operations. If you are doing so for larger pieces, you may be able to obtain a federal tax deduction for that equipment purchase. This is available at as much as $1 million, depending on qualifications. This is a big tax credit for many small businesses that may need to upgrade or modernize equipment to maintain their overall functionality. Keep in mind that you are able to take up to a 100 percent bonus depreciation deduction on some types of equipment, depending on when it was purchased. It is very important to work with your accountant to manage depreciation over the long term.

#10: Consider an Accelerated Income and Expense Deferral

One opportunity that may be available to some companies is an option for deferring expenses and accelerating income. Let’s say you operate your business on a cash basis for tax purposes. You expect to see profits that are lower in 2021 than they were in the previous year. However, you believe that your business will see more profit in the coming year. In this case, consider the benefit of accelerated cash collection prior to the last day of the year. You can also delay deductible expenses until the next year. Invoice customers early and encourage them to pay this year. Doing this may help you to have a lower tax on the income you collect this year.

#11: Write Down Obsolete Equipment and Inventory

Take some time to calculate your inventory and equipment. If you have equipment that is no longer beneficial to your company, worthless, obsolete, or even damaged, it may be time to take it off the accounting records. Doing so may help to boost your expenses and, as a result, reduce your tax liability on those items.

To do this, you need to have a list of all of your equipment. You then need to mark those items as obsolete, out of date, worthless, damaged and unrepairable, or otherwise damaged. Then you will need to consider the expenses as they relate to them. Work with your accountant to ensure you get the right information in place to take full credit for items like this.

#12: Give Your Employees a Bonus

Yes, it has been a rough year for many companies, but that is just more reason to focus on giving back this year. It may help you to reduce your costs, too. You may qualify to see a tax deduction for the expenses related to bonuses, gifts, or parties you hold for your employees. Your company may be able to reduce bonuses paid to shareholders and owners if you own an S corp, as well. For C corps, you can only deduct bonuses that have 50 percent or more ownership at the time that the bonus goes out. Keep in mind sole proprietors, partners, and LLC members may not qualify for this type of deduction.

#13: Charitable Contribution Deductions

For 2021, there is also a change in the way charitable contributions can be made. Corporations are able to deduct up to 25 percent of their taxable income – that is up from the 10 percent limit prior to the placement of the CARES Act. That is a significant boost and a good way for companies to give back to charities that are important to them. Business owners that are sole proprietors or pass-through entities may even benefit more from the cash contributions they make. It is a good idea to speak to your accountant about these types of contributions. That’s because you need to be sure the organization is recognized as an eligible charity.

#14: Bonus Depreciation May Help

Some organizations may be able to take bonus depreciation. This is a provision that lets companies depreciate 50 percent of the adjusted basis of some types of property they have. This type of deduction can only be taken in the year that the asset is put into service for your company, though. It may help you to reduce costs a bit more. Some states, though, have modified or even denied this added depreciation. You will need to be sure it is approved in your state to ensure you can obtain this deduction and cost savings opportunity.

#15: Take a Look at Your Books

For companies that may have been using the same accounting software or tools year after year, it may be time to take a closer look. Are you using an accountant for your books or trying to process these changes – and all of them – on your own?

For the 2021 tax year, it is likely to be much more complex to manage taxes due to all of the new tax laws to aid companies during the pandemic. It may be time to hire an accountant to ensure you are getting the most out of your investments. If you are already using an accountant, set up a meeting to discuss options for improving your company’s outcomes and see if there is any way you can reduce liability. If you are keeping your own books and records, consider taking an online accounting course for small business owners to optimize your accounting      process. 

    Bookkeeping

#16: Take a Profit and Loss Glance

If you are working with an accountant or using accounting software, now is a good time to pay closer attention to your profit and loss statement. While you may not be able to make a significant difference this year, you can start to make changes heading into next year. Where are your losses? Where is it possible to improve your profit margin? Are you charging enough? Take the time to analyze this information now as you head into the coming year

#17: Review Salaries

That includes reviewing your own salary. Many small business owners do not do this enough, and it can cost them. It is important to take a look at how much you are taking for the company and ensure it is enough. You want to be sure you are meeting the IRS minimum requirement for your salary based on the industry you are in and the income.

#18: Set Up for Success for Next Year

Small business tax planning is not just about the quarter you are in. In fact, you need to consider your goals for next year. It pays to pay close attention to how you are operating right now. For example, are you meeting your financial goals? What could you do differently in 2022 that could help to improve operations? Take a look at your leadership, management team, key employees, and overall business structure. It may be necessary to make some updates.

#19: Review Insurance Products

One key area not to overlook is your business insurance. Set up some time to talk about your options for the coming year with your agent. Ask for discounts. Ask to keep costs lower as you head into the new year, recognizing that you may not have filed a claim in a while. Remember, try to get this cost for the next quarter, at least, paid out in advance.

#20: Update Your Accounting Software

How much do you really know about what is happening financially in your company month to month? If you are like many companies, you don’t have that information readily available. However, new accounting software is incredibly fast and efficient, allowing you to gain more insight in real-time, which facilitates better decision-making.

Year-end tax planning for small business owners does not have to be complex, but it is something you should do now. Don’t avoid it. It may help you to ensure your business will be profitable in the coming year. It may also help you take advantage of all opportunities in this year’s tax rules.

Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.

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