December 31st will be here before you know it and once the clock ticks January 1, most tax planning for 2020 is done.
With that being said, we still have plenty of time to get tax savings in before 12/31, we just need to act now.
Here are five powerful business tax deduction strategies that you can easily understand and implement before the end of 2020.
Prepay Expenses Using the IRS Safe Harbor
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
- Under this safe harbor, your 2020 prepayments cannot go into 2022. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
- Qualifying Expenses: Lease payments on vehicles, rent payments (office or machinery), and business insurance premiums.
- Example: You pay $2,000 per month in rent and would like a $24k deduction this year. On Thursday, 12/31/2020 you mail a rent check for $24,000 to cover all of your 2021 rent.
- You deduct $24,000 (the year you paid the money).
- The landlord reports taxable income of $24,000 in 2021 (the year they received the money).
- A win-win situation, just don’t surprise your landlord because if they receive the money in 2020 they will need to pay taxes on that in 2020.
Stop Billing Customers, Clients, and Patients
Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2020. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)
- Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.
- Example: A business attorney generally bills his clients at the end of each week; however, in December he sends no bill. Instead he gathers up those bills and sends them the first week of January. Bingo! They just postponed paying taxes on their December 2020 income by moving that income to 2021.
- Caution: If you have clients that are known to have issues getting you paid in time this is a strategy you likely will not to use for them. Most importantly you want to ensure you still get paid.
Buy Office Equipment
Planning to make some equipment purchases? Do it now instead of later.
- With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2020.
- Qualifying bonus depreciation and Section 179 purchases include new and used personal property such and machinery, equipment, computers, desks, chairs, other furniture, and certain qualifying vehicles.
Use Your Credit Cards
Assuming you have a business credit card, you get the deduction on the day of charge, not when paid.
- If you are a single-member LLC or sole prop, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.
- If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
- But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31. Look at our accountable plan article and Podcast episode for more information on this.
- Caution: Don’t just spend to spend. Ultimately you do not want to be wasting money on things you do not need but if you plan to purchase items in early 2021 why not purchase those now via a CC to get them on the books and pay for it later.
Don’t Assume You Are Taking Too Many Deductions
The IRS code was written the way it was for a reason, so you can utilize it to your advantage.
- If your business deductions exceed your business income, you have a tax loss for the year. This a “net operating loss,” or NOL.
- If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.
- What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.
- COVID-19 changes the NOL slightly. Two opportunities come from the CARES act:
- Allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years for refunds against prior taxes.
- Allows application of 100% of the NOL to the carry back years
- Previously you could only carry forward your NOL and it could only offset up to 80% of your taxable income in any future year.
Remember, once the calendar rolls over to 2021 the majority of tax planning opportunities get tossed out the window. You have time now, take a couple hours to strategize and implement so you can ensure when you file your tax return you are paying the lease amount in taxes as legally possible!
If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.