Five Things Business Owners Can Do at Year-End to Lower Their Taxes

#1 Buy that big item you’ve been waiting to buy – equipment, vehicle, computer

Bonus depreciation allows businesses to deduct a more significant percentage of the cost of their purchased assets the year they are acquired instead of depreciating them for years. Depreciation is the gradual charging to expense of a fixed asset, this means you are reducing your taxable income over a few years instead of all at once.

What constitutes a large purchase? Typically anything over $2,500.

Currently, bonus depreciation is at 100%, meaning if you purchase a piece of equipment by the end of the year, you may be able to deduct the full amount of your purchase.

According to the official website of the IRS, bonus depreciation “applies to business property acquired after September 27, 2017, and placed in service after September 27, 2017, and before January 1, 2023.”

Starting in 2023, bonus depreciation will be reduced to the following rates:
2023: 80%
2024: 60%
2025: 40%

Overall, if taken advantage of, this favorable depreciation deduction will deliver tax-saving benefits to many businesses in 2021.

Here are some tax-deductible things you may want to purchase before the end of the year:

  • Office supplies (e.g., paper)
  • Equipment (e.g., computer)
  • Company vehicle
  • Machinery

Consider the Timing of Your Purchase
In order to receive your savings from this deduction, all your equipment must be purchased and put into service by December 31, 2021, at midnight. With the continued pandemic, it’s important to note supply chain issues are still widespread. Deliveries are taking longer than expected, leaving many customers unsure whether or not it is the right time to buy. To avoid any uncertainty, we recommend purchasing or leasing your equipment as soon as possible.
Keep in mind that if you use the standard mileage, that already includes depreciation for your vehicle. Here is more information on business vehicle depreciation deduction: https://mileiq.com/blog-en-us/business-vehicle-depreciation-deduction

#2 Establish and fund your retirement plans!

One area where successful self-employed people are often better off than employees is retirement plans. The government allows the self-employed to set up retirement accounts specifically designed for small business owners. These accounts provide enormous tax benefits–tax deductions for plan contributions and tax deferral on investment earnings until retirement. There are an array of retirement accounts available–solo 401(k)s, IRAs, SEP-IRAs, Simple IRAs, and Keogh plans.

How much you can contribute each year depends on the type of plan you have and the amount of your net earnings from self-employment. For example, the maximum contribution for a solo 401(k) plan is 20% of your net self-employment earnings plus an elective deferral contribution of up to an annual threshold amount. Check the IRS website for annual contribution limits.

You can contribute to these plans and take a deduction up until the time your tax return for the year is due–April 15th or October 15th if you file an extension. However, you must establish a solo (401)(k) by December 31st to take deductions for your contributions in that year.

#3 Donate to charity

For 2021, special rules extend and expand the generous tax treatment for qualifying cash contributions previously allowed nonitemizers in 2020. Non-Itemizers can deduct up to $300 in the case of single taxpayers and married persons filing separately—and up to $600 for married couples filing joint returns—for cash contributions made to qualifying charities in 2021. As the standard deduction continues to creep up, it is harder to reach the threshold to itemize your return.

For 2021, itemizers are allowed to claim charitable contribution deductions for cash contributions up to 100% of their adjusted gross income (AGI). These tax benefits will not apply after 2021 unless Congress amends the law.

#4 Write off damaged inventory

As you begin taking year-end inventory, it is a great opportunity to track any damaged, lost or deteriorated inventory.

When the inventory loses its value, the loss impacts the balance sheet and income statement of the business. The amount to be written off is the cost of the inventory and the amount of cash that can be obtained by selling off or disposing of the inventory in the most optimal manner.

The impact of this is:
A reduction of the business’ net income and therefore, its retained earnings.
The reduction in retained earnings, in turn, decreases the shareholders’ equity in the balance sheet.

#5 Have clean business records

Your recordkeeping process plays a big role in how efficiently you file your taxes and how effectively you are able to claim tax deductions. The more organized and up-to-date your books are, the easier it is to fill out your business tax return. With a solid accounting process, you can avoid mistakes, potentially receive a higher refund, and enjoy hassle-free tax filing.

Ready to put these tax savings into action? Contact us to set up a strategy call.

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