Tax Planning

6 year-end tax planning steps for small enterprise homeowners

6 year-end tax planning steps for small business owners to minimize taxes for 2021.


While the 2022 tax season may be months away, New Year’s Eve will be there before you know it. The fourth quarter is the time for proactive tax planning to lower your tax bill in 2021. For business owners, tax planning shouldn’t be done once a year when filing your taxes. In the event of renewals, you may be able to postpone filing your 2021 taxes until the end of 2022. However, many tax planning steps that can help lower your total taxes owed may need to be done before the end of the current year.

Check how your company is doing

What is the corporate structure of your company? Are you an individual entrepreneur, S-Corp, LLC, Partnership or C-Corp? As your business and income grow, the best structure for your business may change. You should check this with your CPA and certified financial planner every few years (more often if your business is growing rapidly or ownership has changed).

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Review your company pension plan

One of the best ways for small business owners to cut their taxes is to set up a retirement plan. This can be anything from a SEP IRA to a Solo 401 (k) to combining a 401 (k) with a defined benefit retirement plan. Would you rather write a large check to the IRS or on your own retirement account? The choice is obvious to me. In case you’re wondering, high-income small businesses can potentially defer income taxes to hundreds of thousands of dollars a year.

Here are some of the most common retirement plans for high income small business owners.

SEP-IRA – If you are self-employed, you can pay 20% of your self-employed income per year into a SEP IRA, with a maximum contribution of $ 58,000 in 2021. There are no catch-up contributions for SEP IRAs. Without a year-end, a SEP IRA can be set up just before filing your taxes for the previous year.

only 401 (k) – Typically, a Solo 401 (k) will allow the largest pre-tax contributions, which should result in less tax owed. Business workers are allowed to deposit up to $ 19,500 plus a catch-up contribution of $ 6,500 for 2021 if they are at least 50 years old. In addition, the company can provide a profit sharing of up to 25% of the wage bill. That means a total of $ 58,000 (or $ 64,500 for those over 50) could be saved provided the individual met the maximum amount allowed by the IRS ($ 19,500 for 2021) and the company the maximum allowable amount on payroll contributed.

You can also benefit from a Roth Solo 401 (k) for the employee’s share of your contributions, $ 19,500 plus a $ 6,500 catch-up contribution for entrepreneurs over the age of 50. It can be included in the plan, essentially doubling the contribution amount and tax saving.

Defined benefit plan – For those in need of huge tax savings, the defined benefit retirement plan is king. Combine it with a 401 (k) profit sharing plan and your business could be wasting a few hundred thousand dollars a year. You can also call this a cash balance plan.

Defined benefit plans are the most difficult retirement plans for small businesses to set up because they are complex and time consuming to set up. If you think this could help your business keep more of their hard-earned cash, speak to your trusted financial planner ASAP. The extra work is well worth it for high income small business owners willing and able to maximize contributions to their 401 (k) and defined benefit plans. Contribution limits vary based on age and income, but can often exceed $ 150,000 per business owner per year. The tax savings can be huge, especially for those in high-tax countries like California and New York.

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Are you entitled to the home office allowance?

During the COVID pandemic, more and more small business owners started working from home full-time. Business owners reading this who work from home may be eligible for the Home Office Deduction. Here’s what you need to know to determine if you qualify and to get a better understanding of how that often scary home office deduction works.

This valuable tax break can save hundreds or even thousands of dollars in taxes every year. The best part is that regardless of your business use, you already incur these living expenses. Take the time to discuss the home office deduction with your tax advisor to make sure you qualify.

A shoebox isn’t a great filing system if you’re a business owner and want to file your taxes … [+] easier and cheaper.


Don’t ignore your accounting

Filing taxes is a stressful process even for the most organized business owner. Please do not try to collect your taxes from a shoebox full of receipts. Split your bookkeeping and bookkeeping throughout the year. This can easily be done using software such as QuickBooks. For a more complicated business with lots of bills and expenses, consider hiring an accountant. At least avoid hesitating until tax time to get your books in order. Missed tax deductions increase your taxable income and are essentially like throwing money away.

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Claim bonus depreciation in the first year

One of the positive changes from the Tax Cuts and Jobs Act (TCJA) is that you can now receive a 100 percent bonus write-off in the first year on qualifying used and new properties that were acquired and put into service during your fiscal year 2021. To put this more clearly, you may be able to get a tax reduction on the total cost of assets in 2021. If you’re having a high income year, you might want to move some planned purchases into 2021.

Proactive tax planning for potential tax changes by 2022

In planning for 2021 and 2022, there are proposals from the Biden administration to increase taxes for those who earn more than $ 400.00 per year as a single parent and $ 450,000 for married couples filing together. Many entrepreneurs find themselves with incomes above this level. While you shouldn’t be making major tax planning decisions based on government proposals, you should be prepared for possible changes in the taxation of your income. The higher your tax bracket, the more valuable tax planning is for you and your company.

Even without changes to the tax law by the Biden administration, many of the current changes to the TCJA (Trump Tax Plan) are only expected to last until 2025. While the TCJA should be a big win for all taxpayers, many have criticized that it only benefits the super-rich and has pushed many into the middle class. Now Trump is talking about a new tax cut for the middle class; how that would be paid is a guess.

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Be proactive in your tax planning

With the right timing (through proactive tax planning), your income and deductions could become even more valuable. For those using pass-through businesses (sole proprietorship, S Corp, LLC, or Partnership), your portion of business profits and deductions will be passed on to you and ultimately taxed on your own personal tax return. Taxes are based on your total household income and enrollment status.

As it stands now, the 2021 income tax brackets are like the 2020 brackets, with some small adjustments for inflation. If you expect to be in a similar or lower tax bracket in the next year, you may want to try moving some income to 2022. Likewise, you may also want to postpone some tax deductions until 2021. Saving strategies can help move some of your taxes from 2021 to 2022, which will give you a little more time to pay Uncle Sam.

You should take the reverse tax planning approach if you are expected to be in a higher tax bracket in 2022. In this case, you want to accelerate the income until 2021 if possible. Or you might want to postpone some prints until 2022. This would mean that you would have to tax more income this year (2021), but would have an overall lower net tax rate for the two years together.

For the self employed, 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 for making proactive tax planning decisions that will help you keep more of your hard-earned cash. For retirement accounts, would you rather write a check to yourself or to the IRS? It’s your decision.

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