Year-End Tax Tips for Businesses

Help improve your bottom line with these tax mitigation strategies.

It’s almost time to close the books on another tax year, but it’s also time to be open to the many opportunities designed to alleviate your tax burden. Here are a few to get the ball rolling. While these are by no means exhaustive, they should be enough to get you started when it comes to tax-saving tactics that could work for you and your business. With a complex and ever-changing tax code, it’s a good idea to schedule a meeting with your financial advisor and tax professional.

Did you buy new equipment? Take a deduction.

Section 179 of the IRS tax code was created to encourage businesses to invest in themselves. It allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year from your gross income. This deduction of up to $1,040,000 is good on new and used equipment, as well as off-the-shelf software. To take the deduction for tax year 2020, the equipment must be financed or purchased and put into service before the end of the calendar year.

It’s important to note, though, that $2,590,000 is the 2020 spending cap on equipment purchases. The deduction begins to phase out on a dollar-for-dollar basis above that amount and is eliminated once $3,630,000 in purchases is reached. Section 179 was enacted to help small businesses by allowing them to take a depreciation deduction in one year, rather than over a period of time. 

BONUS: Take advantage of the 100% bonus depreciation for 2020, which is generally taken after the Section 179 spending cap is reached. The bonus depreciation is available for qualified equipment acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. For equipment acquired before Sept. 28, 2017, and placed in service before January 1, 2018, bonus depreciation remains at 50 percent.

Defer income and accelerate deductions.

Obviously, any income you receive by Dec. 31 counts as income for the current year, but there are ways to put off income to the next tax year and also reduce your adjusted gross income this year. There are several strategies to increase deductions now if you expect your income to be at the same or a lower rate next year. For example, you can send your invoices out a few days later in December to delay receiving payment until January. Conversely, you can prepay some bills that are due in January to take the deduction for this tax year. A little foresight here can add up to big tax savings.

Redesign your company retirement plan.

If your business has changed significantly since you first started a company retirement plan, it’s a good idea to make sure this important employee incentive is still the right fit. There are several options to choose from, including SIMPLE IRAs, profit-sharing and safe harbor 401(k)s. A qualified plan offers a deduction for your contributions, and you defer tax on earnings on contributions. Talk to your advisor.

Reconsider your business structure.

A multiple-owner LLC is taxed as a partnership by default, while a single-owner LLC is taxed as a sole proprietorship. However, LLCs can choose to be taxed as a C corporation or S corporation by filing IRS Form 2553. Owners with an LLC can still elect to be taxed as an S-corporation retroactively at year’s end. There are some conditions that apply, so talk to your tax professional.

Find the silver lining of a net operating loss.

If your business losses exceed your income for the year, the excess can lower your income and cut your tax bill in another year. These rules were adjusted by the Tax Cuts and Jobs Act of 2017 (applying losses to prior years was disallowed, the carryforward time limit was removed, and deductions were limited to 80% of taxable income) and have been temporarily changed again by the 2020 CARES Act (losses from 2018, 2019 and 2020 may be carried back five years with deductions up to 100% of taxable income). 

The rules and formulas involved with this maneuver can be complex, so you’ll want to consult your tax professional about the specific applications. 

Deduct vehicle expenses.

If you use your vehicle to visit clients or attend business meetings away from your office, you may deduct expenses by taking either the standard mileage reimbursement rate for 2020 (57.5 cents per mile) or calculating your actual expenses. For example, if you drive your car 20,000 miles per year and 10,000 of those miles are for business, you can claim 50% of expenses such as gas, tires, repairs, insurance, license and registration fees, and depreciation. 

Note that you can’t use the actual expense method if you are leasing a vehicle and previously used the standard mileage rate. If you own two vehicles, include both cars in your deductions. Make sure you keep an accurate mileage log and receipts.

Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.