Year-End Tax Planning Checklist for Businesses
Quick Links to Specific Year-End Tax Planning Strategies & Checklists:
– Year-End Tax Planning & Strategies Overview
– Year-End Tax Planning – What’s New for 2022
– Year-End Tax Planning Checklist for Individuals
√ Year-End Tax Planning Checklist for Businesses <– YOU ARE ON THIS PAGE
– Year-End Checklist for Payroll & 1099 Reporting
Year-End Tax Planning Checklist for Businesses
Cash Basis Receipts & Spending –
√ If your business is on the cash basis accounting method, defer income by delaying invoicing customers. Note that “constructive receipt” determines when income is received, which includes anything received, in hand or via the mail.
√ Also for cash basis taxpayers, pay expenses before the end of the year, whether by mailing the check or through the use of credit cards. Don’t forget to consider interest on loans and any State/County taxes.
√ Purchase non-inventory supplies and do any needed repairs and maintenance by year-end.
√ Pay your children for their time spent working in your proprietorship business. They can each earn up to $12,950 without having to file and pay Federal or Idaho taxes ($2,420 for Oregon), and your business gets the deduction! Remember that payroll reports and W2s need to be filed.
√ If you are considering maximizing owner profit-sharing contributions or C Corporation owner compensation, you need to have your business accounting up to date and accurately estimate year-end net taxable income, as well as make any corresponding or related transaction by December 31.
√ Consider the effectiveness of year-end expenditures on “passive” business activities. If you have passive business investments (i.e. rentals) and anticipate having a loss, be aware that there are limitations to the amount of passive losses that can be taken on your individual tax return.
State and Local Tax (“SALT”) Cap Workaround –
This is a new year-end tax planning strategy we first used in 2021* that may save you Federal income tax. For owners of a pass-through-entity (“PTE”) like S-Corporation, Partnership or Limited Liability Company, the business can prepay its share of state income tax before the end of the year which can result in an additional deduction on your federal income tax return.
The strategy applied here is that the business can pay state income taxes and deduct them as a Federal business expense when, if the same taxes were paid by the individual, the state income taxes would be limited to a the $10,000 SALT cap on the individual’s personal tax return (Schedule A – Itemized Deductions).
15 states adopted this a SALT workaround in 2021 (including Idaho), and 5 more states adopted it for 2022 (including Oregon).
Note that this strategy needs to be implemented before the end of the year. The estimated state income taxes needs to be paid by the business and submitted with a business tax voucher.
* In 2020, the IRS released Notice 2020-75 which approved the availability and functionality of such a workaround.
See our SALT Cap Workaround article for more information and discussion on this topic.
Year-End Purchases –
√ Buy equipment by December 31 to take advantage of the business property expensing / depreciation options.
- Section 179 Expense – For equipment you buy in 2020, you don’t have to pay cash; financed purchases qualify if the asset is received and put into service by year-end.
- The new law increased the maximum deduction to $1,080,000.
- It also increased the phase-out threshold from $2.7 million to $3.78 million.
- The new law also expands the definition of section 179 property to include certain improvements made to nonresidential real property, such as a fire suppression system.
- There are special rules for vehicle purchases. Vehicles under 6,000 pounds do not qualify for the Section 179 expense. SUV’s over 6,000 pounds are limited to $25,000 of allowable Section 179 expense. For more information, see my post “Section 179 Deduction”.
- Bonus Depreciation is reestablished allowing a deduction of qualified assets placed in service during the year.
- The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Beginning in 2023, the percentage will drop each year by 20% until bonus depreciation sunsets in 2027 (unless Congress acts to extend it).
- Bonus Depreciation was originally limited to qualified “new” assets. The definition of eligible property was expanded to include “used” property if the property is acquired from an unrelated party during the year.
- State Differences… Note that some State amounts for Section 179 and/or Bonus Depreciation may be different which could result in a State taxable income amount different from your Federal taxable income.
Year-End Action Items –
√ Take a physical inventory count and consider items that are obsolete or damaged. If your business produces, purchases or sells merchandise, you must have an accurate accounting of each year-end inventory to compute the cost of goods sold.
√ If you anticipate having a loss from your ownership interest in an S Corporation, Partnership or Limited Liability Company (LLC), make sure you have enough basis to deduct these losses on your individual tax return.
Retirement & Employee Benefit Programs –
√ If you want a Keogh, Profit-Sharing or Pension Plan, it must be set up by year-end. Businesses will have until the tax return deadline in 2021 to make contributions to these plans and still take the deduction on your 2020 return.
√ Set up an employee benefit program (i.e. AgriPlan/BizPlan) to take a 100% tax deduction on your Proprietorship (Schedule C or F) for family health care expenses.
Business Entity Changes –
√ If you plan to incorporate your business, you need to do this before you begin operating in the next year. Contact your legal counsel to get this started as soon as possible.
Circular 230 Disclosure: This is to advise you that, unless expressly stated, nothing in this communication (including any attachment or other accompanying materials) was intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding any federal tax penalties, or for promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to anyone.