RENO, Nev. — For business owners, another year is coming to a close, which means now is the time to review your tax strategies.
There may still be opportunities to adjust your tax plan and save money. Ask yourself the following questions — and consider the subsequent guidance — to uncover some of those potential opportunities for 2020, 2021 and beyond.
Did you purchase equipment this year?
Business owners can write off 100% of the equipment’s purchase price using bonus depreciation and/or IRC 179 expenses election.
Depending on how your taxable income is trending this COVID year, you may want to consider “opting-out” of bonus depreciation. The “opt-out” will require you to depreciate the asset over is MACRS life (generally 5, 7 or 15 years, using the double declining balance, or 150% declining balance).
If this year is an off year, you may consider postponing the purchase until 2021 to take 100% bonus depreciation in 2021.
Cash basis taxpayers beware!
Quite common in tax planning land is paying as many expenses as your bank account can handle.
This COVID year, consider backing off the throttle and leaving some cash in the bank. Tax rates can vary year over year from 10% to 37%.
Also, while operating losses can be carried forward or back, self-employment losses cannot. Savvy taxpayers maximize their after-tax cash flow year over year. You simply can’t make enough money this year if it only saves you 10%, if you have to pay 37% next year!
Did you purchase, construct or renovate an office building?
Consider performing a cost segregation study. A cost segregation study may help reclassify the cost of the building to shorter depreciation class lives or even allow you to expense some costs immediately using bonus depreciation.
Have you maximized your retirement accounts?
If you are deferring wages into a 401(k) plan, for example, contribute as much as you can. The maximum amount you can defer to your 401(k) plan for 2020 is $19,500; however, if you’re over the age of 50, you can contribute an additional $6,500 on top of that $19,500.
Don’t have a retirement plan, or want to put additional amounts away for retirement? You can contribute to an Individual Retirement Account (IRA); the maximum amount anyone under the age of 50 can contribute for 2020 is $6,000. Once you reach age 50, you can contribute another $1,000 for a total of $7,000.
Contributions to an IRA, even a nondeductible IRA, could be an option to help you avoid the 3.8% investment tax on your investment income.
Talk to your tax advisor if you have additional retirement account questions. They can help you determine if you should:
- Make Roth deferrals or pre-tax deferrals.
- Save additional money through a “backdoor” Roth conversion.
- Use a savings incentive match plan for employees’ (SIMPLE) IRA plan.
- Look into a safe harbor 401(k).
- Consider a cross-tested plan.
- Install a cash balance defined benefit plan.
These are all great scenarios to consider.
Remember — timing is everything
The current IRS position is that expenses paid with tax-free PPP loan proceeds. The advice du jour is to accelerate forgiveness if your income is in the tank this year.
Most businesses will wait until 2021 for forgiveness. In the realm of full disclosure, certain political parties have campaign promises to increase taxes should they be elected. So, chose wisely.
There are a variety of different year-end tax strategies to consider for your business. Each situation is unique to each business, so weigh all of the potential options carefully.
Special thanks to CLA’s Mark Debroux and Rich Tower for assistance with this article.
Mike Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. He’s also the host of “Bosma on Business,” which airs Saturdays at 10 a.m. on Newstalk 780 KOH. Reach him for comment at email@example.com.