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Tax Planning

5 Year-End Tax Planning Strategies For Your Business

As the end of the year is approaching it’s time to consider implementing some last-minute tax planning strategies that will help reduce your 2021 taxes. Here are five tax reduction ideas.

Prepay Expenses Using the IRS Safe Harbor

The IRS has a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge.

Under this safe harbor rule, your 2021 prepayments cannot go into 2023. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $2,000 a month in rent and want an additional $24,000 deduction this year. So on Friday, December 28, 2021, you mail a check for $24,000 to cover all of your 2022 rent. Your landlord does not receive the payment in the mail until Tuesday, January 4, 2022. Here are the results:

You deduct $24,000 in 2021 (the year you paid the money).

Your landlord reports taxable income of $24,000 in 2022 (the year the money was received).

It’s best if you mail the check using one of the Postal Service’s tracking delivery methods so you have proof of the date of mailing.

Stop Billing Your Customers, Clients, and Patients

This is an easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2021. (We assume that you or your corporation is on a cash basis.)

Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jim, an attorney, usually bills his clients at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. He just postponed paying taxes on his December 2021 income by moving that income to 2022.

Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2021.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business expenses.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you by December 31.

Establish Your 2021 Retirement Plan

Does your business have a retirement plan in place?

If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2021.

Some common retirement plans include profit sharing plans, 401k plans and Simplified Employee Pension Plans.

Year-End Tax Planning Strategies

If you believe that you’ll be in a higher tax bracket in 2022, you may not want to defer income and accelerate deductions this year, but do just the opposite.

Our CPAs can help  develop year-end tax planning strategies that will reduce your taxes. Call us today at 561-826-9303.

Contact Us 

You deserve the best in IRS tax representation, tax preparation, and tax planning services. At East Coast Tax Consulting Group, you’ll work with a licensed CPA who will handle your case from beginning to end. We invite you to contact our team to schedule a free, confidential consultation.