As 2020 draws to a close, there is still time to reduce your 2020 tax bill and plan ahead for 2021. This article highlights several potential tax-saving opportunities for owners of businesses operating as S corporations or limited liability companies.
Deferring Income into 2021
Deferring income to the next taxable year is a time-honored year-end planning tool. If you expect your taxable income to be higher in 2020 than in 2021, or if you anticipate being in the same or a higher tax bracket in 2020 than in 2021, you may benefit by deferring income into 2021.
Accelerating Income into 2020
You may benefit from accelerating income into 2020. For example, you may anticipate being in a higher tax bracket in 2021, or perhaps you need additional income in 2020 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2020 will be disadvantageous if you expect to be in the same or lower tax bracket for 2021. If you report income and expenses on a cash basis, issue bills and attempt collection before the end of 2020. Also, see if some of your clients or customers are willing to pay for January 2021 goods or services in advance. Any income received using these steps will shift income from 2021 to 2020.
Common Business Deductions
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 7.5%-of-AGI floor.
Equipment Purchases: If you purchase equipment with a life of 20 years or less you are allowed to deduct 100% of the cost in the year that you purchased the equipment. Qualified Improvement property which is 15-year property qualifies for 100% bonus. The definition of QIP is improvements to the interior portion of a nonresidential building placed in service after the building is placed in service.
Bad Debts: You can accelerate deductions into 2020 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2020 year-end financial statements.
Popular Business Credits
Small Employer Pension Plan Startup Cost Credit: Certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. Maximum credit is $500 per year.
Credit for Employee Health Insurance Expenses of Small Employers: Eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for their employees. Generally, employers with 25 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of less than $54,000 are eligible for the full credit. The credit is 50% of the amount of the health insurance costs.
Employer-Provided Child Care Credit: Employers may claim a credit of up to $150,000 for supporting employee childcare or childcare resource and referral services. The credit is allowed for a percentage of “qualified childcare expenditures,” including for property to be used as part of a qualified childcare facility, for operating costs of a qualified childcare facility, and for resource and referral expenditures.
Credits are still available for qualified energy property placed in service in 2020. The credit amount for 2020 is 26% of the cost. Property that qualifies is solar, solar fiber-optic, and qualified fuel cell.
There is still time to implement these strategies to minimize your 2020 tax liability and plan for 2021. Contact us today if you have any questions about tax-saving opportunities.