VonLehman: Year-End Tax Planning Tips for Small Businesses
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Dont fret, you still have options to significantly reduce this years business income tax bill and VonLehman is here to help. Here are four possible moves to consider – but stay tuned for developments, as tax laws are ever-evolving.
1. Write Off Asset Additions
There are two different ways a business can fully write off asset purchases for their business: 100% first-year bonus depreciation and/or Section 179 expense. Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), 100% first-year bonus depreciation is available for qualified new and used property thats acquired and placed in service in the calendar year 2021. That means your business might be able to write off the entire cost of some or all of your 2021 asset additions on this years federal income tax return. Section 179 expense also gives you a very similar benefit of writing off the full cost of the new or used asset on the federal return. However, there are some limitations – if you bought more than $1,040,000 of assets, for example. Keep in mind, you dont get this same benefit on your Indiana tax return. You must add back the full cost of the asset and then take a depreciation deduction for the normal allowable amount. Also, new or used SUVs, pickup trucks or vans can qualify for the 100% bonus depreciation.
2. Manage Current-Year Business Income and Deductions
If your business operates as a pass-through entity such as a sole proprietorship, S corporation, partnership, or LLC taxed as a partnership, your shares of various tax items are accounted for on your personal return and net income is taxed at your personal federal income tax rates.
The traditional strategy of deferring taxable income into next year while accelerating deductible expenditures into this year makes sense. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2021 until 2022. Look at expenses that you typically purchase in January, like office supplies or marketing collateral, and consider paying those before year-end. Also, consider paying recurring monthly expenses early, like internet, cell phone, utilities or rent.
3. Maximize the Deduction for Pass-Through Business Income
The deduction based on an individuals qualified business income (QBI) from pass-through entities (mentioned earlier) is a key element of the TCJA. The deduction can be up to 20% of a pass-through entity owners QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owners taxable income.
You can also claim the QBI deduction for up to 20% of qualified real estate investment trust dividends, and up to 20% of qualified income from publicly traded partnerships.
Because of the limitations on the QBI deduction, year-end tax planning moves (or lack thereof) can increase or decrease your allowable QBI deduction. For instance, year-end moves that reduce this years taxable income, like taking bonus depreciation or Section 179 expense, can have the unanticipated negative side effect of reducing this years QBI deduction. Work with your tax advisor to optimize your results.
4. Establish a Tax-Favored Retirement Plan
If your business doesnt already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions.
Examples of small-business retirement plan options include:
- 401(k) plans, which can even be set up for just one person – also called a solo 401(k)
- Defined benefit pension plans
- SIMPLE IRAs
Depending on your circumstances, these other types of plans may allow bigger deductible contributions, or a combination of plans may yield even greater savings. There are deadlines by which some of these plans need to be established and communicated to employees if you have employees other than yourself. Consult with your tax or financial advisor on those key dates. Timing is everything and even if you couldnt take advantage of these tips for this current filing season, they will be around for as long as we pay taxes. Consult with your tax advisor to make sure these tips are on your mind as you navigate 2022. For any questions related to this article, or tax guidance in general, please contact tax specialist Dan Kraft at dkraft@vlcpa.com or 800-887-0437.
