The calendar may say that most of 2021 is complete, but when it comes to taxes you still have time to make an impact. Here are five tips that can help reduce your business’s tax liability by Dec. 31.
Get professional advice
Before taking steps to reduce your tax bill, check with your tax adviser to ensure the strategy is right for your business. You’ll want to review 2021 revenue, expenses, tax payments already made, and anticipated tax liability with your accountant to get a better view of the big picture — and which approaches will be in alignment with your personal and business tax interests.
Consider these year-end financial moves
- Speed up deductions and expenses. Through 2022, you can reduce your tax bill by depreciating 100% of most fixed-asset purchases. With some exceptions, these asset purchases (such as machinery, equipment, computers, appliances and furniture) count as deductions and qualify for bonus depreciation in the year they were bought and placed in service. Additionally, Section 179 of the tax code allows you to count as deductions the full cost of assets purchased. Under this provision, the 2021 deduction limit is $1,050,000, with a maximum purchase price of $2,620,000.
In terms of expenses, you can write off accounts payable items that may not be due until the new year rolls around, or services that you won’t need until 2022, if they’re paid for by the end of the year. You could also provide a year-end bonus to employees as a way to increase deductible expenses in 2021.
- Think retirement funds. Whether you have an individual retirement account, a 401(k) or another type of employer-sponsored retirement plan, you may be able to reduce your taxable income by making contributions to it. If you don’t yet have a retirement plan for yourself and your employees, there might be time to set one up before the end of the year. Consult with your tax professional to determine which plan may be right for you.
- Eat, drink and be merry. The Consolidated Appropriations Act of 2021 makes it possible to claim 100% of food or beverage expenses paid to restaurants if the business owner or an employee is present when the food or beverages are provided, and the expense is reasonable. “Restaurants” includes businesses that prepare and sell food or beverages for immediate consumption (in-house or takeout), but excludes grocery stores and convenience stores that sell prepackaged goods. This temporary provision is in effect from Jan. 1, 2021 through Dec. 31, 2022.
- Accelerate or defer. Depending on what you expect your profit margin and tax liability to be, it may make sense to accelerate your income or defer your earnings. Check with your tax professional to determine if this is a good strategy for you.
- Donate. You can take deductions on charitable contributions made before year-end, such as financial gifts, vehicles and other property. Your tax professional can best advise you about your particular situation.
Review your legal structure
The S corporation, C corporation, or limited liability corporation you established when you started your business was likely a good fit at the time, but circumstances may have changed. Updates to tax laws, business growth, and other factors can impact whether the structure fits with your current needs and future direction. Consult with legal and accounting advisers to assess whether you want to stay the course with your structure or change it.
Analyze estimated taxes and withholding
Unlike employees, small-business owners don’t have taxes withheld from their paychecks. That’s where quarterly tax payments and withholding from your own wages come in. Penalties and interest accrue when taxes are not paid on time, which you can reduce or avoid by making estimated payments that cover as much as possible of what you will owe. Your tax adviser can help with this as well.
Watch for tax-law changes
With legislation pending in Congress, the federal tax code may be updated coming soon — and the changes could affect your business. Keep an eye out for an announcement about new and updated provisions, and seek professional advice about what they will mean for your business.
Lisa Franz, CPA, joined CB Smith & Associates as a senior tax manager in 2020. She has more than 25 years of professional accounting experience and specializes in business, individual and fiduciary taxation, business consulting and accounting. She holds a Bachelor of Arts in accounting from North Carolina State University. She is a member of The Georgia Society of CPAs, the American Institute of CPAs and the National Charity League.