Year-End Tax Planning Tips for Your Business
Will impending legislation increase your taxes in 2022?
As we approach the end of 2021, it isn’t too late to take advantage of tax minimization strategies for your business. Here are a few tips — but each situation is different, so contact MyCFO to make all the right moves for your company.
- Develop a multi-year horizon. Some tax moves that you make in 2021 could end-up hurting you in 2022, so plan for several years (e.g., if you put too much in one year, you might be climbing into a higher bracket and paying more tax). Especially if your business is considering expansion, relocation or some other major change, it is important to look at the long-term tax ramifications.
- Purchase equipment. If you’re planning on buying equipment, consider doing it before the end of the year to take advantage of the Section 179 expense deduction (rather than requiring the property to be capitalized and depreciated). This property is generally limited to tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business. Note that equipment must be “placed in service,” not just ordered and/or deposit paid.
- Accelerate income? Impact of possible tax law changes. With the uncertainty of tax legislation, it may be a gamble to plan on an anticipated increase in tax rates. If you’re convinced that taxes will go up, you might want to accelerate income, when possible, into 2021. Each situation is different, so talk to your CPA (i.e., it might make sense to defer income).
- Defer or accelerate expenditures? Again, depending on your situation and view on impending tax law changes, consider either deferring or accelerating expenses. If your business is having a bad year in 2021 but you expect a much better 2022, consider delaying the payment of your expenses, especially if tax rates go up.
It is important to note that by choosing to accelerate expenses into 2021, you will need to continue that pattern at the end of 2022, or there will likely be a bump in taxable income in 2022. This should be part of a strategic tax plan, projecting income and expenses for both the current year and following year and determining how to best minimize taxation.
If you are accelerating expenses to 2021, here are some to consider.
- Employee bonuses (bonuses to owners and/or related parties have additional rules)
- Utilities (phone, water and electrical)
- Repairs and maintenance for office equipment
- Office supplies
- Annual memberships
- Computer repairs/upgrades
- Travel expenses
- Vehicle expenses
- Dues and subscriptions
- Postage, Fax and Delivery
- Professional fees
Some specific tips: Consider year-end bonuses to worthy employees, especially to keep them happy if the recruiting market is slim in your area. Since many businesses offer year-end discounts, you may find that it is cheaper to buy before December 31st than after January 1st. If you have business travel that is necessary, book your 2022 flights, hotels and rental cars. Use your credit card or your bank line of credit, then pay those off on January 1st (however, consider your financial institution’s billing cycle and any interest expense policies). For your sales staff, all reimbursable expenses need to be submitted to accounting so that the payment is made in the current year.
- Review retirement plan options. Depending on the type of plan, you may be able to start or add to your retirement plans. You can also deduct set-up and administrative costs (including legal and accounting fees, and any expense related to educating employees about the plans) for retirement plans. In most cases, if the retirement plan is set up before the end of the year, the business can deduct the pension contribution in 2021 even though it is not paid until the due date of the tax return.
PREPARE FOR TODAY & TOMORROW!
2022 is fast approaching – are your ready to make the most money possible? The professionals at MyCFO can offer invaluable expertise in the budgeting process. Contact us today for a free initial consultation!