taxes

Year-end Tax Planning for Small Business Owners

by Eric McGraw, CPA, Senior Tax Manager – ADKF

As the year comes to an end, it is time again to consider how you can keep a little bit more of your money out of Uncle’s Sam pocket. Below is a list of tax ideas for the savvy small business owner. Some you have likely heard of before, but maybe you’ll see something new that will save you some money!

1. PUT YOUR KIDS TO WORK:

As a business owner you can literally put your child on the payroll. You will be able to deduct their wages like you would any other employee, which will lower your taxes. Meanwhile, your child can earn up to $12,400 without paying any federal income tax! This strategy makes the most sense for older children in high school and college. Keep in mind that your child should earn the wages they are paid!

2. CHARITABLE DONATIONS:

If you are thinking of making a large donation to charity, but don’t know who to give the money to, consider a donor recommended fund. These organizations act as an outsourced private foundation, allowing you to donate the money into a holding account and take the related deduction now. At a later date, you may direct the fund to send the money on to charities of your choice.

3. RETIREMENT PLAN CONTRIBUTIONS:

This is one of the best ways to reduce your taxes, for two reasons. First, you keep the money! Second, you can make retroactive contributions after you have a better idea of your tax situation. For example, you can make a SEP IRA contribution in April of 2021 that will be deducted on your 2020 tax returns. Many retirement plans are available, but the most common for small business owners are SEP IRA accounts and 401k accounts. Make sure to discuss with your CPA at tax time!

4. QUALIFIED BUSINESS INCOME DEDUCTION (QBI):

As a business owner, you are eligible for the QBI deduction. This deduction is calculated based on your business net income after your own wages are paid. There are many limitations beyond the scope of this article, but suffice to say, the higher your business income the more likely you are to get a nice QBI deduction. One of the oddities of this deduction is that the W-2 wages you pay to yourself are deducted from your business income. That means it is important to keep your own W-2 wages low to maximize your QBI deduction, as well as pesky payroll taxes.

5. COST SEGREGATION STUDIES:

If you have purchased real estate or completed construction on a new building in 2020, you need to consider a cost segregation study. These studies are conducted by qualified consultants, who will break down the cost of your property into different line items, for example the sidewalk or cabinetry. The reason this is beneficial to you, is that your CPA can take accelerated depreciation on many of these items rather than spreading the write-off over decades. This will reduce your taxes now, but keep in mind your deduction will be smaller in future years.

6. CAPITAL LOSSES:

If you expect to have large capital gains derived from the sale of stocks, real estate, etc., consider harvesting your capital losses before the end of the year to offset the gains. But remember that after you have offset capital gains, you can only deduct an additional $3,000 of capital losses against taxable income. So be mindful that harvesting losses may not wipe out all your taxes.

7. SPEND MONEY:

Purchase equipment and vehicles to get a quick write off through 100% bonus depreciation. Pay bills before the end of the year to get the deduction on your 2020 tax return. Remember that the IRS doesn’t care if you use cash or credit. That means that you can use loans or credit cards to get a deduction now. But keep in mind you will have to pay back the people you borrow money from!

8. DON’T SPEND MONEY:

Remember that your tax write-off is saving you cents on the dollar. In other words, a dollar spent will save you somewhere between zero and fifty cents in taxes. Don’t spend a dollar just to save fifty cents! Make sure that your expenditures make sense for you and your business.

If you are a current client of ADKF, please contact your service team to let them know you would like to schedule year-end planning. If you are not yet a client of our firm, we would be delighted to conduct an initial consultation at no charge. We have a local office in Boerne, right next to Mary’s Tacos! BBM

Eric McGraw, CPA, is a Senior Tax Manager at ADKF with over ten years of experience in public accounting. He is a member of the AICPA, TXCPA, and San Antonio CPA Society. He is a graduate of the University of Georgia but is a naturalized Texan by marriage. Eric specializes in business consulting and tax planning for closely held businesses. ADKF.com | (830) 387-4441