Year-End Tax Planning Strategies

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So, we’ve finally reached the fourth quarter (Q4) and there’s one thing that should be on your to-do list before the year is out, some proactive tax planning strategies to lower your tax bill for 2021. Though tax planning strategies shouldn’t only be implemented in the fourth quarter – we recommend it as a year-round task – there’s still time to make some major impact on your tax liabilities with our year-end tax planning tips. What can you do in Q4 to save your company money when filing your 2021 tax return?

Examine Your Business Structure

The first thing to look at with your year-end tax planning is how your business is structured. Are you a sole proprietor? A partnership? A limited liability company (LLC)? An S-Corp? A C-Corp? Your business structure doesn’t have to remain the same as it was when initially set up. As your business grows, your structure may need to change to accommodate this growth.

And each type of structure impacts how your business files its taxes. For example, if you’ve opted to be structured as a C-Corp, you’ll be faced with double taxation. The corporation pays federal income tax on the net income, and the shareholders pay the federal income tax again on the dividends they receive. Whereas if your business is structured as a sole proprietor, partnership, LLC, or an S-Corp, you’re considered a ‘pass-through’ business for tax purposes. Your business wouldn’t be subjected to any corporate tax. Still, instead, shareholders report their share of the company’s income and losses on their tax return, paying taxes once at the personal income tax rate.

It’s a good idea to regularly review your business structure every few years with your tax accountant to ensure the structure is the most suitable for your business, leading to a lower tax bill.

Review COVID-19 Tax Provisions

In March 2021, the American Rescue Plan (ARP) Act was enacted to help individuals and businesses deal with the global pandemic and its subsequent economic disruption. Many of these provisions may affect you and your tax liabilities this year.

Employee retention credit (ERC) – This was put in place to encourage businesses to keep their employees on payroll during the pandemic. The ERC is a payroll tax credit that is refundable to the employer and is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by the COVID-19 pandemic.

Sick leave credits – This new Act also extended the family and sick leave credits first introduced under the Families First Coronavirus Response Act. Eligible employers are entitled to tax credits for the wages paid for leave taken by employees related to the COVID-19 pandemic. The ARP Act extended these credits to cover periods of leave up to 30 September 2021.

Evaluate if You Are Eligible for the Home Office Deduction

Remote working became the new norm during the COVID-19 pandemic, with many of us working from home full-time. If yours was a business that relied on remote working this year, then you may be eligible for the home office deduction. 

The home office deduction tends to be quite daunting to business owners as the eligibility criteria can be difficult to navigate. We recommend consulting with your accountant or financial experts regarding your year-end tax planning to see if your business is eligible for this deduction. This tax break could save you thousands of dollars in taxes each year if eligible.

Is Your Accounting Up to Date?

The key to year-end tax planning is organization. Filing your tax return can already be stressful for many, but ensuring that your accounting is organized and up-to-date will help ease a lot of this stress. If you’ve been busy and have slacked off in the accounting department, there is still time to work with an accountant to get your company’s financial records in tip-top shape, so Q1 tax preparation goes off without a hitch.

This quarter is the time to sit down and schedule the tasks that need to be completed to file your tax return for 2021. The earlier you start, the more prepared you will be. Starting your year-end tax planning earlier will also give you a chance to review your financial records, balance your books, and take note of any deductible expenses. Missed tax deductions will just mean your business has to pay more in taxes. 

Reviewing your records and processes will also identify gaps or issues in your company’s finances that can then be resolved with time to spare and then avoided in the future.

Spend, Spend Spend

Our last tip for your year-end tax planning is to buy any tax-deductible items you may need for your business now in Q4 before you file your 2021 tax return. Buying these items now will allow you to deduct them on your tax return resulting in a lower tax bill. Therefore, now is the time to buy if you have any tax-deductible purchases planned for next year or have been thinking of a purchase over for a while.

Other Tips That We Suggest:

  • Maximize your 401K plan contributions – both your contribution and the maximum matching funds as a “benefits” write-off for the business.
  • Buy a company vehicle. Also, have the business employ Nora so you can write off her company vehicle as well. Finally, the IRS requires you to have a good reason for using two cars instead of one for your business. However, it shouldn’t be hard to come up with one (for example, you don’t want to put too many miles on each car).
  • You can begin offering employee health benefits and disability insurance, a write-off to the company.  However, as an S-Corp, the cost of your health insurance as the owner would be reported as income to you personally.
  • Take advantage of a health savings account. An HSA offers a triple tax break: The money you put in escapes taxes, the balance grows tax-deferred, and withdrawals used to pay medical expenses are tax-free.
  • Increase your charitable contributions and/or increase your company’s sponsoring of events that are important to you (such as advertising expenses).
  • Buy your company building.  You can rent the part you do not use and deduct depreciation and interest on the loan payments as a business expense; while you are building wealth (the value of the property).
  • Misc. deductions are no longer available on your tax return. So, be sure to reimburse yourself for any and all business-related expenses you might be paying personally.
  • Consider tax-free bonds.

Finally: Be Proactive in Your Tax Planning

Now that you know how to get your taxes for the 2022 tax filing season, you can be more proactive about annual tax planning to ensure you make the most effective strategic decisions for your business each and every quarter. 

Year-end tax planning shouldn’t be a task that’s relegated to the fourth quarter but an integrated task throughout the year so that your business is always on top of its finances. This could be through regularly reviewing your accounting and bookkeeping in each quarter or ensuring that you’re aware of the tax deductions you’re eligible for and taking advantage of them, for example.

Year-end tax planning can be a daunting task to get started on, which is why we recommend working with a reputable tax advisor to prioritize and implement tax-saving and tax planning strategies all year long. It’s also important to keep your accounting and bookkeeping organized and up-to-date so you can more easily file your tax return each year. And that’s what Simple Startup is here for – if you need help with your tax preparation, filing, and consulting, grab some time on our calendar.