Minimizing your company’s taxes is a year-round effort. Consider the following tax minimization strategies for your year-end spending and tax planning.
1. Section 179 Deduction for Investments in Property and Equipment
Companies can deduct as much as $1 million for purchases of qualified depreciable property and equipment under Section 179 of the federal tax code. Qualifying real property expenditures include investments in nonresidential buildings, such as improvements to roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.
You may also be able to deduct as much as $1.04 million for 2020 if you buy qualified new or used equipment and place it in service by year’s end. Most tangible goods used by businesses qualify for a Section 179 deduction for 2020, including vehicles, software, office equipment and machinery. Deductions end at purchases of $2.59 million, but you may be able to take a 100% bonus depreciation for 2020.
2. Deferring Taxable Income and Accelerating Tax Deductions
If you use cash accounting, you could mitigate taxes by managing your year-end income and revenue. For example, invoicing customers in 2021 for work done in 2020 would push your revenue into next year, thereby reducing this year’s taxes.
Similarly, you could reduce your taxes for 2020 by increasing your deductions—for example, by charging recurring expenses due in early 2021 to credit cards now, paying expenses with checks mailed this year or just prepaying expenses such as a month or two of next year’s rent.
3. R&D Credit for Qualified Research Expenses
The research and development tax credit encourages companies to invest in new technology, products and services. It provides a dollar-for-dollar credit against your tax liabilities, which means you can re-invest any money you spend on R&D.
- Developing a new or improved product or a new technology
- Creating a new production process or improving current processes
- Developing or improving software
- Developing prototypes or models
Many businesses that have not taken the credit before could do so for the first time in 2020 if they developed or improved their products or processes in response to the COVID-19 pandemic.
Start-ups, in particular, should think about how to capitalize on the R&D credit. In theory, this is the government rewarding their innovation with savings.
4. Qualified Business Income Deduction for Business Owners
If you own a small business, you may be able to deduct 20% of qualified business income from your federal taxes if you pay taxes on pass-through business income yourself rather than through your company. Such income typically comes through partnerships, sole proprietorships or S corporations.
Examples of qualified business income include deductions for contributions to qualified retirement plans, self-employed health insurance and the deductible part of self-employment tax. Deductions start phasing out for business owners with taxable incomes of $326,600 for joint filers ($163,300 for other filers) and end for owners with more than $426,000 in taxable income for joint filers ($213,300 for other filers). President-elect Joe Biden’s tax plans include phasing out QBI deductions for income over $400,000.
5. Tax-Favored Employer Retirement Plans
Contributing funds to a company retirement plan is another good year-end tax planning strategy. You can reduce taxable income by investing in a 401(k) plan, a profit-sharing plan or a simplified employee pension individual retirement account (SEP IRA), for example.
If you have not set up a plan for your company yet, you have until Dec. 31 to do so if you would like to make a qualified contribution for 2020. Looking ahead, President-elect Biden has proposed offering tax credits to small businesses that adopt workplace retirement savings plans.
6. Expiring Tax Credits
Now is the time to take advantage of tax provisions that will expire at the end of 2020. For example, you could be eligible for the Work Opportunity Tax Credit (WOTC) if you hire targeted employees such as veterans, ex-felons or the long-term unemployed. The Work Opportunity Tax Credit is limited to the Social Security tax owed or the amount of business income tax liability.
7. CARES Act Provisions
COVID-19 pandemic relief could affect your taxes. Your taxable income could increase if you had a stimulus loan forgiven. You also might not be able to deduct payroll expenses that were paid with proceeds from a forgivable Paycheck Protection Program loan.
You also should consider when you would pay any payroll taxes that you deferred under the CARES Act. Though you must pay half of any deferred taxes by the end of this year, you could wait until Dec. 31, 2021, to pay the remaining balance, depending on what you determined to be the most advantageous for your business. Consult with your tax advisor before the year ends so that you can act on the most current information regarding pandemic relief.
8. Previous Year(s) Net Operating Losses
The CARES Act also lets businesses use current losses for quick refunds. You can take net operating losses (NOLs) from tax years as late as 2018 and carry them back as many as five years to get refunds against prior taxes. If your first NOL will be in 2020, then you will want to file this year’s return early so you can claim your NOL carryback refund sooner. You also may be able to use an NOL to reduce taxable income in future tax years.
This year may be ending, but you can still reduce your taxes for 2020 if you act now. Beyond these immediate opportunities, you can also position your company for future success by adopting year-round tax mitigation strategies for your business.
Don’t overlook any last-minute tax savings for 2020. Contact Paro for a consultation.