There are several year-end tax planning strategies available to entrepreneurs to help them reduce their tax liability. Let’s take a look:
Businesses using the cash payment method can move revenue to 2022 by moving year-end invoices so that payment doesn’t come until 2023. Companies using the accounting method can postpone revenue to January 2022 by deferring the delivery of goods or services.
Buy new office equipment
Bonus depreciation. Businesses are allowed to immediately deduct 100% of the cost of eligible property such as machinery and equipment that is commissioned after September 27, 2017 and before January 1, 2023: 80% in 2023, 60% in 2024, 40% in Year 2025 and 20% in 2026.
The 100% bonus depreciation deduction for the first year is available for qualifying assets even if they are only put into operation for a few days in 2021.
Section 179 expenses. Businesses should use Section 179 spending this year whenever possible. In 2021, organizations can decide as an expense (immediately deduct) the total cost of most new equipment up to a maximum of $ 1.05 million of the first $ 2.62 million of real estate commissioned through December 31, 2021 . Note that the Section 179 allowance must not exceed net taxable business income. The deduction will be phased out one dollar at a time for amounts in excess of the $ 2.62 million threshold and will be eliminated for amounts in excess of $ 3.67 million.
Computers or peripheral devices that were put into operation after December 31, 2017 are not included in the listed properties.
Qualified property. Qualified property is property that you put into operation during the tax year and predominantly (more than 50 percent) used in your trade or business. Property that is put into service and then sold in the same tax year does not qualify, nor is property converted for personal use in the same tax year in which it was acquired.
Taxpayers can also include certain improvements to non-residential properties after the property is first put into service.
1. Qualified improvement attribute refers to any improvement to the interior of a building; However, improvements are not qualified if they are due to:
- the extension of the building,
- an elevator or escalator or
- the inner structure of the building.
2. Roofs, HVAC, fire protection systems, alarm systems and security systems.
These changes apply to properties that are put into operation in tax years from December 31, 2017.
Real estate-qualified improvement properties can be settled immediately thanks to the CARES Act, which has corrected an error in the Tax Reduction and Employment Act. Taxpayers also have the option of changing their 2018 tax return if necessary.
If you have any questions about qualified properties, please contact the office.
Other end-of-year promotions to take advantage of
Qualified company income deduction. Many business taxpayers – including owners of companies operated by sole proprietorships, partnerships, and suburban corporations, as well as trusts and estates – may be eligible for qualified business income. This deduction is up to 20 percent of qualifying business income (QBI) from any qualifying trade or corporation for the 2018 through 2025 tax years. Your taxable income must be less than $ 164,900 for single and householders and $ 329,800 for married taxpayers. Filing the joint tax returns to avail the deduction in 2021.
The QBI is complex and tax planning strategies can directly affect the deduction amount, increasing or decreasing the dollar amount. Therefore, it is important to speak to a tax advisor before the end of the year to determine the best way to maximize the deduction.
Small healthcare business tax credit. Small business employers with 25 or fewer full-time equivalent employees with an average annual wage of $ 50,000 that is inflation-indexed (e.g., $ 56,000 in 2020) may be eligible for a tax credit to pay for employee health insurance. The credit is 50 percent (35 percent for non-profit organizations).
Corporate Energy Investment Tax Credit (ITC). Business energy investment tax credits will still be available, and businesses that wish to receive these tax credits will still be able to do so. The energy credits for companies include geothermal electricity, large wind turbines (running at the end of 2021) and solar energy systems that are used to generate electricity, heat, cooling or hot water for use in a building or to provide solar process heat. There is also a tax credit of 30 percent for offshore wind farms in inland or coastal waters if construction begins before 2026. however, passive solar and solar pool heating systems are excluded. Utilities are also allowed to use the credits.
Repair regulations. If possible, repairs and expenses should be deducted immediately at the end of the year and not capitalized and depreciated. Small businesses lacking Applicable Financial Statements (AFS) can leverage the de minimis safe harbor process by deducting smaller purchases ($ 2,500 or less per purchase or invoice). Companies with valid annual accounts can deduct $ 5,000. Small businesses with gross revenues of $ 10 million or less can also use Safe Harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this subject.
Depreciation restrictions for luxury vehicles, passenger cars and heavy vehicles. As a reminder, the tax reform changed the depreciation limits for luxury cars that were put into operation after December 31, 2017. If the taxpayer does not request a bonus write-off, the maximum allowable write-off amount for 2021 is $ 10,200 for the first year.
The deductions are based on a percentage of business usage. An entrepreneur whose business use of the vehicle is 100 percent can make a higher deduction than one whose business use of a car is only 50 percent.
For passenger cars eligible for the first year additional bonus depreciation, the maximum first year depreciation is still $ 8,000. It applies to new and used vehicles (“new for you”) that were acquired and put into operation after September 27, 2017, and applies to tax years up to December 31, 2022. In combination with the above-mentioned increased depreciation, the deduction is made up to $ 18,200 in 2021.
Heavy vehicles, including pickups, vans, and SUVs, with a gross vehicle weight rating (GVWR) greater than 6,000 pounds, are treated as a means of transportation rather than passenger vehicles. Therefore, heavy commercial vehicles (new or used) that were put into service after September 27, 2017 and before January 1, 2023 also qualify for a 100 percent depreciation allowance in the first year.
Retirement provision. Self-employed people who have not yet done so should set up an independent pension plan by the end of 2021. Call today if you need help setting up a retirement plan.
Dividend planning. Reduce accumulated corporate profits and profits by issuing corporate dividends to shareholders.
Paid family and sick leave loan. A trade tax credit is available to employers who grant skilled workers paid family and sick leave until 2025. Employers must have a written policy that meets certain requirements and meets other conditions. The credit, which is scheduled to expire in 2020, has been extended to 2025. It ranges from 12.5% to 25% of the wages paid to eligible employees for up to 12 weeks of family and sick leave per tax year.
Employment Opportunities Tax Credit (WOTC). Extended through 2025 (The Consolidated Appropriations Act, 2021), the Work Opportunity Tax Credit is available to employers hiring the long-term unemployed (unemployed for 27 weeks or more) and is generally 40 percent of the first $ 6,000 of wages paid at one time new employees.
Above Juanita Bauer, CPA
Juanita Farmer writes the Financial Cents blog. Juanita Bauer. CPA is a managing partner of JD Farmer & Associates, LLC, an accounting firm based in Germantown, Maryland. Ms. Farmer has worked in accounting and taxation for over 27 years.