Several year-end tax planning strategies are available to business owners to reduce their tax liability. We’ll take a look:

Deferred income

Businesses using the cash method of accounting can defer their revenue to 2022 by delaying year-end invoices so that payment is not received until 2023. Businesses using the accrual method can defer their invoices. income by delaying the delivery of goods or services until January 2022.

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Amortization bonus. Businesses are allowed to immediately deduct 100% of the cost of qualifying goods such as machinery and equipment put into service after September 27, 2017 and before January 1, 2023, after which it will be gradually reduced over a four-year period. : 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.

The 100% first year bonus depreciation allowance is available for qualifying assets even if they are only commissioned for a few days in 2021.

Article 179 Expenses. Businesses should take advantage of section 179 to expense this year where possible. In 2021, companies can choose to expense (immediately deduct) the total cost of most new equipment up to a maximum of $ 1.05 million of the first $ 2.62 million of goods put into service. ‘by December 31, 2021. Keep in mind that the Section 179 deduction cannot exceed the net taxable income of the business. The deduction is being phased out dollar for dollar on amounts exceeding the $ 2.62 million threshold and eliminated above amounts exceeding $ 3.67 million.

Computer or peripheral equipment put into service after December 31, 2017 is not included in the listed properties.

Qualified property. Qualifying property is defined as property that you put into use during the tax year and used mainly (more than 50%) in your trade or business. Property put into service and then disposed of during the same taxation year is not eligible, nor are property converted for personal use in the same taxation year in which it is acquired.

Taxpayers can also choose to include certain improvements to non-residential real estate after the date the property was first brought into use.

1. Qualified improvement property refers to any improvement made to the interior of a building; however, improvements are not eligible if they are attributable to:

  • expansion of the building,
  • any elevator or escalator or
  • the internal framework of the building.

2. Roofs, HVAC, fire protection systems, alarm systems and security systems.

These changes apply to property brought into use in taxation years that begin after December 31, 2017.

Real estate properties that qualify as improvement are eligible for immediate expense, thanks to the CARES Act, which corrected an error in the law on tax cuts and employment. Taxpayers also have the option to amend the 2018 tax returns, if necessary.

Please contact the office if you have any questions regarding the qualified goods.

Other end-of-year movements to take advantage of

Deduction for eligible business income. Many business taxpayers, including business owners operated through sole proprietorships, partnerships and S corporations, as well as trusts and estates, may be eligible for qualifying business income. This deduction is worth up to 20 percent of the qualifying business income (QBI) of a qualifying trade or business for the 2018 to 2025 tax years. Your taxable income must be less than $ 164,900 for single filers and heads of households and $ 329,800 for married taxpayers filing joint returns. to take advantage of the deduction in 2021.

The QBI is complex and tax planning strategies can directly affect the amount of the deduction i.e. increase or decrease the dollar amount. As such, it is important to speak to a tax professional before the end of the year to determine the best way to maximize the deduction.

Small Business Health Care Tax Credit. Small business employers with 25 full-time equivalent employees or less with an average annual salary of $ 50,000 indexed to inflation (for example, $ 56,000 in 2020) may qualify for a tax credit to help pay employee health insurance. The credit is 50 percent (35 percent for nonprofits).

Corporate energy investment tax credit (ITC). Business energy investment tax credits are still available, and businesses that wish to take advantage of these tax credits can still do so. Business energy credits include electric geothermal systems, high winds (expires at the end of 2021) and solar energy systems used to generate electricity, heat, cool or provide hot water to use in a structure, or to provide solar process heat. There is also a 30% tax credit for offshore wind installations in inland or coastal waters if construction begins before 2026. Hybrid solar lighting systems, which use solar energy to illuminate the interior of the house. a structure using sunlight distributed by optical fiber, are also eligible; However, passive solar and solar swimming pool heating systems are excluded. Utilities are also allowed to use the credits.

Repair regulations. Whenever possible, year-end repairs and expenses should be deducted immediately, rather than capitalized and amortized. Small businesses that do not have Applicable Financial Statements (AFS) can take advantage of de minimis safe haven by choosing to deduct smaller purchases ($ 2,500 or less per purchase or invoice). Companies with applicable financial statements can deduct $ 5,000. Small businesses with gross revenues of $ 10 million or less can also take advantage of the Safe Harbor for qualifying building repairs, maintenance and upgrades. Please call if you would like more information on this topic.

Amortization limits on luxury cars, passenger cars and heavy vehicles. As a reminder, the tax reform changed the depreciation ceilings for luxury passenger cars put into service after December 31, 2017. If the taxpayer does not claim bonus depreciation, the maximum depreciation allowance allowed for 2021 is $ 10,200 for the first year.

Deductions are based on a percentage of commercial use. A business owner whose commercial use of the vehicle is 100 percent may qualify for a larger deduction than one whose commercial use of a car is only 50 percent.

For passenger cars eligible for the additional depreciation premium for the first year, the maximum depreciation for the first year remains at $ 8,000. It applies to new and used (“new to you”) vehicles acquired and put into service after September 27, 2017 and remains in effect for tax years until December 31, 2022. Combined with depreciation grossed up above, the deduction is up to $ 18,200 in 2021.

Heavy vehicles, including pickup trucks, vans and SUVs with a Gross Vehicle Weight Rating (GVWR) greater than 6,000 pounds, are treated as transportation equipment rather than passenger vehicles. As such, heavy vehicles (new or used) put into service after September 27, 2017 and before January 1, 2023, also benefit from an additional depreciation allowance of 100% in the first year.

Retirement plans. Self-employed people who have not yet done so should set up an independent pension plan before the end of 2021. Call today if you need help setting up a pension plan.

Dividend planning. Reduce corporate profits and accumulated profits by paying dividends to shareholders.

Paid family and medical leave credit. A business tax credit is available for employers offering paid family and medical leave to eligible employees until 2025. Employers must have a written policy in place that meets certain requirements and other conditions. The credit, which will expire in 2020, has been extended until 2025. It ranges from 12.5% ​​to 25% of salaries paid to eligible employees for a maximum of 12 weeks of family and medical leave per taxable year.

Work Opportunities Tax Credit (WOTC). Extended until 2025 (The Consolidated Appropriations Act, 2021), the Work Opportunities Tax Credit is available to employers who hire long-term unemployed (unemployed for 27 weeks or more) and is usually equal to 40 percent of the first $ 6,000 of salary paid on a new hire.

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Juanita Farmer, CPA

On Juanita Farmer, CPA

Juanita Farmer writes the blog “Financial Cents”. Farmer Juanita. CPA is the Managing Partner of JD Farmer & Associates, LLC, an accounting firm located in Germantown, Maryland. Ms. Farmer has practiced in the accounting and tax industry for over 27 years.