Tax Moves You Must Make By the End of the Year to Avoid Missing Out
If you wait until it's time to file your tax return to try to find deductions, it might be too late. Your tax return only shows what you did during the tax year, so if you want to cut your tax bill, you need to plan ahead and get things done before the end of the year.
Open a Small Business Retirement Account
You can open a personal Roth or Traditional IRA up until your filing deadline, but small business retirement accounts have varying deadlines. Here's the latest you can open a new plan:
• SEP IRA: Tax filing deadline.
• 401(k): End of tax year (December 31st for calendar-year filers).
• 401(k) with safe harbor provision: Enough time to make three months of contributions before the end of the tax year (October 1st for calendar-year filers). A safe harbor provision allows the owner to max out their own contributions without violating top-heavy rules as long as they make specified contributions to employee accounts.
• SIMPLE IRA: October 1st. If the business opened after that date, as soon as administratively practicable.
In most cases, you can make your actual contributions up until your tax filing deadline no matter which plan you choose. The key is to select and open a plan early so that you have the full range of options.
Check Your Section 199A Deduction
The Section 199A deduction allows you to deduct up to 20% of your business profits on your personal tax return, but it has a big catch. If you're a specified service business and make too much, you lose the entire deduction. If you're not a specified service business and make too much, your deduction depends on your wages and capital.
What you need to do now:
1. Estimate your net profit to see if you will qualify.
2. Adjust your income and/or expenses accordingly (more below).
3. Explore increasing your wages and capital if you're a non-service business with profits over the basic threshold.
Time Your Income
You may want to accelerate income into this year or push it into next year depending on whether you expect to be taxed more favorably this year or next year. This might be because of your tax bracket, available deductions or credits, or upcoming tax changes.
One option is sending invoices out a little slower at the end of the year or sending them early with a discount for paying by 12/31. If you're close to closing a large sale, you might push to get everything done before the holidays or save the paperwork until after.
What you can't do is not cash a check or wait to pick it up from the client. Once you have access to funds, it counts as income for that year even if you wait to make the deposit.
Time Your Expenses
Similarly to timing your income, you may want to accelerate or defer expenses depending on whether you need a deduction to offset higher than usual taxes or are in a lower tax bracket this year because your income was down. You may also wish to see if any special deductions or credits are available such as the ones for green energy or electric cars.
Make Your Section 179 Decision
Section 179 is a tax provision that lets small business choose whether to fully expense assets upon purchase or to capitalize them and take a depreciation deduction over time. This is similar to timing expenses, but there are two additional things to keep in mind.
• The deduction is generally for the year you placed the asset in service. Buying something at the last minute might not work if it won't be delivered until the new year.
• There's an annual dollar limit. If you're up against the limit and want to take this deduction, you may need to defer some purchases until the next year.
To figure out your projected tax bill and what moves you should make to minimize the taxes you pay both this year and in the future, schedule a tax planning meeting with your accountant well before the end of the year.