As the days get shorter, the time for attending to important year-end tax actions also becomes shorter. Here are 10 small business tax tips to help you reduce taxable income on your business tax return for this year and get ready for next year.
10 year-end tax planning actions for small businesses to take now:
- Review your numbers
- Apply for PPP loan forgiveness
- Give year-end bonuses
- Make charitable contributions
- Buy needed equipment
- Take a physical inventory
- Decide on income deferral or acceleration
- Decide on accelerating or deferring expenses
- Put your 2021 benefits plans in place now
- Get ready for 2021
1. Review your numbers
The first action is to meet with your CPA or other tax advisor to review where you stand now. This will dictate the actions you can afford to take and how they will affect your tax liability for the year.
If you don’t have a tax advisor, at least review your financial statements year-to-date to know whether you’ve been profitable or are in a loss position. Knowing your numbers — and general rules for small business taxes — affects the tax actions to pursue.
2. Apply for PPP loan forgiveness
Applications began to be accepted on Oct. 2, 2020, and you do have time to submit yours (before the maturity date of the loan, which is two years or five years from the loan’s origination date, depending on the terms of the loan). But deferral of loan payments may be much shorter (see ).
3. Give year-end bonuses
If your business survived the pandemic, and you want to reward employees who helped you through, decide on what you can afford to pay as year-end bonuses. In making this determination, factor in the cost of payroll taxes on the bonuses. Also, take into account the impact of bonuses on employer contributions to retirement plans and on non-exempt workers under the .
4. Make charitable contributions
This is a year not like any other in terms of great need by many people and businesses. Charitable organizations are providing help, and businesses and owners who can afford to make contributions can take tax deductions for this assistance.
Reminder: If your business adopted a to enable employees to help each other through their unused vacation, sick, or personal days, the business must make a cash donation equivalent to the donated leave time to a charity providing aid to victims of the coronavirus before Jan. 1, 2021.
5. Buy needed equipment
If your business needs new tablets, iPhones, or machinery, you can buy them now and fully deduct them in 2020 for federal income tax purposes (state income tax rules may differ) as long as they’re placed in service before the end of the year, meaning ready to be used in the business. This is so even if you finance the purchase in whole or in part.
If 2020 hasn’t been a great year, but you still need the equipment, you can simply claim regular depreciation. You can do that instead of taking a full write-off (explained in ) using the Section 179 deduction (first-year expensing), bonus depreciation, or a de minimis safe harbor of up to $2,500 per item or invoice.
This spreads the deduction over a set number of years (generally five to seven years, depending on the item) and can be more valuable tax-wise if your business is profitable in future years.
6. Take a physical inventory
Taking a physical inventory before the end of the year helps you determine shrinkage (loss of items due to employee theft, shoplifting, administrative error, vendor fraud, damage, etc.) so you can write down your inventory and not overpay on your sales revenues. It also allows you to decide on how to handle what you have on hand.
For example, you may want to liquidate unsold inventory to a remainder company (a bulk sale), donate items to charity, or offer them for sale at a reduced price for a period ending not later than 30 days after the inventory date so you can take a write-down.
7. Decide on income deferral or acceleration
If you report your income and expenses on the cash method of accounting, you have flexibility in the timing of income at the end of the year. If you’ve had a good year, consider deferring it by holding off on year-end billing so you’ll receive payment in 2021. But don’t wait if you need the cash now or have concerns about a customer’s ability to pay. In that case, bill and get paid as soon as possible.
8. Decide on accelerating or deferring expenses
The flip side to handling income is deciding on accelerating or deferring expenses. If 2020 has been a good year, and you want the small business tax deductions, then “accelerate” expenses by paying all outstanding accounts payable, stocking up on supplies for the coming year, and prepaying certain costs (e.g., rent, insurance, and subscriptions).
9. Put your 2021 benefits plans in place now
It’s not too early to choose your health coverage and employee benefit plans for 2021. Doing this now gives you the time needed to provide the required notice to employees so they can make their decisions. They can determine whether they want to be in your health plan, or how much salary they want to contribute to a 401(k) plan or a medical flexible spending account (FSA) if you offer one.
Look over 2020 employee benefit options and the tax rules applicable to them this year as listed in , but recognize that some of the dollar limits will change for 2021. For example, higher limits apply to for 2021, and other increases have yet to be announced.
10. Get ready for 2021
If you haven’t already done so, get your budget ready for the coming year. For tax planning purposes, factor in law changes that matter to you. For example, the of FICA and self-employment tax in 2021 is going to be $142,800 (up from $137,700 in 2020).
If you opted to defer the employer part of Social Security tax on compensation from March 27, 2020, through the end of the year, half of the deferred amount is due by and the other half by the end of 2022.
Failing to take action now can cost you in higher taxes, and you can miss out on savings opportunities to which you are entitled. For example, the is set to expire at the end of 2020 unless Congress extends it.
If you’re now adding to your payroll, don’t overlook a tax credit for hiring someone who falls within a targeted group (e.g., the long-term unemployed, meaning someone who has been unemployed for 26 consecutive weeks). You get the employee you need and a tax break to boot.
It makes sense to pay for professional tax advice if it saves you taxes.