5 Year-End Tax Moves to help your small business pay less in taxes.
While tax season may be months away, December 31st will be here before you know it. The fourth quarter is the time for some proactive tax planning to lower your 2019 tax bill. With extensions, you may be able to delay filing your 2019 taxes until late 2020. However, many tax-saving moves need to be made before the end of the year.
Set Up The Best Retirement Plan For Your Small Business
One of the best ways for small business owners to slash their taxes is to establish a great retirement plan. This could be anything from a SEP IRA to a Solo 401(k), up to the combination of 401(k) with a defined-benefit pension plan.
SEP IRA – If you are self-employed, you can contribute 20% of your self-employment earnings into a SEP IRA, per year, with a maximum contribution of $56,000 for 2019. There are no catch-up contributions for SEP IRAs. With no year-end deadline, a SEP IRA can be set up just before filing your taxes for the previous year.
Thumbs up if you have set up the best retirement plan for your small business?
Solo 401(k) – Typically, a Solo 401(k) will allow for larger pre-tax contributions, which should translate into fewer taxes being owed. Business employees are allowed to contribute up to $19,000 for 2019 plus a $6,000 catch-up contribution if they are at least 50 years old. Additionally, the business will be able to make a profit-sharing contribution, up to 25% of payroll. That means a grand total of $56,000 (or $62,000 for those over 50) could be saved provided the individual contributes the maximum amount allowed by the IRS ($19,000 for 2019), and the business contributed the maximum allowable amount for payroll.
Defined-Benefit Pension Plan – For those needing huge tax savings, the defined-benefit pension plan is king. Combine it with a 401(k) profit-sharing plan, and your business could sock away a few hundred thousand dollars per year.
Pension plans are the most complicated of the small business retirement plans to set up because the plan design is complex and time-consuming. If you think this may help your business keep more of its hard-earned money, talked to your trusted fiduciary financial planner ASAP.
Work from home? Your small business may qualify for the Home Office Deduction.
Home Office Deduction
Are you self employed or a small business owner? If you work from home, you may be able to take the home office deduction. Here is what you need to know to determine if you qualify and get a better understanding of how this often-scary deduction works.
This valuable tax break can save hundreds, or even thousands, of dollars in taxes. The best part is that you are already incurring the expense for housing regardless of your business. Take the time and discuss the home office deduction with your tax preparer to make sure you qualify.
Get Your Books In Order
Even for the most organized business owner, tax time can be stressful. If your book is a mess year after year, consider hiring a bookkeeper or, at the very least, taking the time to get your books in order ahead of a tax deadline.
Claim First-Year Bonus Depreciation
One of the positive changes from the Tax Cuts and Jobs Act (TCJA) is that you can now get a 100% first-year bonus depreciation for qualified used and new property that was acquired and placed in service during your 2019 business year. In plain English, you may be able to get a tax break for the entire cost of assets purchased in 2019. If you are having a big income year, you may want to consider moving up some planned purchases into 2019.
Planning for 2020 Taxes
When planning for 2020, most rates will be similar to the tax rates for 2019. A few small adjustments to brackets and retirement plan limits have already been announced by the IRS for 2020. Even if we choose a new president in the November election, the new president and Congress would need to decide to enact a retroactive tax change for 2020. While that could happen, major changes that late in 2020 are unlikely. Changes beyond 2020 are much more likely as both parties are campaigning on tax law changes for the future.
Many of the current changes from the TCJA are expected to last through 2025. While the TCJA was supposed to be a huge win for all taxpayers, many have complained that it only benefits the super-rich and has shafted many in the middle class. Now, Trump is talking about a new tax cut for the middle class; how that would be paid for is anyone’s guess.
While tax planning for your small business may be no fun, what you can do with all the tax savings … [+]
Be Proactive With Your Tax Planning
With proper timing (from tax planning), your income and deductions could become more valuable. For those who use a pass-through entity (Sole Proprietor, S Corp, LLC, or Partnership), your portion of the business profit and deductions are passed through to you and eventually taxed on your own personal tax returns. Taxes are based on your overall household income and filing status.
The 2020 federal income tax brackets are similar to the 2019 brackets, with a few small adjustments for inflation. If you expect to be in a similar or lower tax bracket next year, you may want to try and defer some income into 2020. Likewise, you may also want to move some tax deductions up into 2019. At the very least, these tax-saving strategies can help defer some of your taxes from 2019 to 2020, which will give you a little more time to pay Uncle Sam.
You will want to take the opposite approach if you are expecting to be in a higher tax bracket in 2020. In this case, you would want to accelerate income where possible into 2019. Or, you may want to delay some deductions until 2020. Doing so would mean that you would have more income taxed this year (2019) but end up with an overall lower net tax rate overall for the two years combined.
Politics aside, minimizing taxation is one of the best ways to increase the net profitability of your small business. Be proactive and work with your certified financial planner and CPA to develop a strategy to make proactive tax planning choices that will help you keep more of your hard-earned money. In the case of retirement accounts, would you rather write a check to yourself or the IRS? The choice is yours.