By: Michael Allbee, CFP®, Senior Portfolio Manager
There are many tax strategies available for business owners, but it requires proper planning throughout the year. Here are some things to consider as we approach the year-end to minimize your tax liability.
Take advantage of the expiring “Tax Cuts and Jobs Act” (TCJA) bonus depreciation
In 2017, the TCJA made it so business owners could deduct 100% of qualifying business property (i.e., new equipment, auto above 6,000 lbs., etc.) in the first year it was put to use. However, this regulation is expiring in 2022, and by 2023, owners will only be able to deduct 80% of qualifying properties within the first year of investment. Then, the percentage drops by 20% each following year. If you need to purchase business-related property, now is the time to do it.
Defer revenue and accelerate expenses (or vice versa)
Many small businesses use the cash method of accounting on their books and tax returns. Under the cash method, a company recognizes income when it’s received and expenses when paid — in other words, when cash actually changes hands. That creates some interesting tax planning strategies.
If you expect to be in a lower tax bracket next year, you might want to defer income to next year, when you’ll pay taxes at a lower rate. The same concept works with expenses. If you’re in a high tax bracket this year, you might want to accelerate expenses in 2022 to reduce your taxable income.
On the other hand, it might make more sense to accelerate income into this year — especially if you think tax rates will increase in the near future. In that case, you might want to send your invoice and try to collect payment from your client in 2022, so more income will be taxed at your current tax rate.
Here’s a handy guide for when to accelerate or defer income and expenses.
Consider the following strategies for executive compensation such as stock options
Take advantage of the home office deduction (if you qualify)
Use required minimum distributions (RMDs) to pay estimated taxes
Business owners typically pay quarterly taxes. For those that want to pay as late as possible, instead of quarterly taxes, you can have money withheld from IRA distributions to pay for taxes.
Take full advantage of tax-advantaged retirement accounts
Set-up or contribute to a retirement account. Deductible contributions to a retirement account such as an individual 401(k), SEP-IRA, or SIMPLE IRA can reduce your 2022 taxable income. Contributing to your retirement accounts may help you build retirement savings over time – without impacting your take-home pay as much as you may think.
Make charitable contributions
If you are charitably inclined, you should plan your donations in advance to ensure you maximize the tax benefits. The most common way to make a charitable gift is with cash. This works fine for smaller gifts (think one-time small charitable donations) but for larger charitable gifts there might be better alternatives to consider. Consider gifting appreciated assets or gifting from your IRA (Qualified Charitable Distributions).
If you’d like to learn more about tax planning strategies unique to your business, feel free to Talk With Us!
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
We get it. With so much going on, it can be easy to forget taking your required minimum distribution (RMD). Failing to take the full amount of an RMD could result in a penalty tax of 50% of the difference. When do I need to take them? How much do I need to take? Can I avoid the ordinary income from the RMD? This 3-minute BFSG short with Paul Horn, CFP® gives a high-level overview of the most important thinks to know.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.
As we approach the end of 2021, now is a good time to take a closer look to make sure you have satisfied your required minimum distributions (RMDs). Generally, RMDs must be taken by December 31 each year (Exception: RMDs are not required from an employer plan if you are still working at the company sponsoring the plan and you do not own more than 5% of the company). Failing to take the full amount of an RMD could result in a penalty tax of 50% of the difference.
Once you reach age 72, you are required to take minimum distributions from your traditional IRAs and most employer-sponsored retirement plans. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 raised the minimum RMD age to 72 from 70½ beginning in 2020. That means if you reached age 70½ before 2020, you are currently required to take minimum distributions. The option to delay to April 1, 2022, applies only to first RMDs for those who have reached or will reach age 72 on or after July 1, 2021.
If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. If you have more than one defined contribution plan, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan (Exception: If you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities).
For those over age 70.5, Qualified Charitable Distributions (QCDs) can be used to satisfy all or part of your RMD (up to $100k). This helps you avoid the distribution being included in your taxable income and is especially valuable for those who don’t typically itemize on their tax returns.
The IRS publishes tables in Publication 590-B that are used to help calculate RMDs. To determine the amount of a required distribution, you would divide your account balance as of December 31 of the previous year by the appropriate age-related factor in one of three available tables.
Recognizing that life expectancies have increased, the IRS has issued new tables designed to help investors stretch their retirement savings over a longer period of time. These new tables will take effect for RMDs beginning in 2022. Investors may be pleased to learn that calculations will typically result in lower annual RMD amounts and potentially lower income tax obligations as a result. The old tables still apply to 2021 distributions, even if they’re postponed until 2022.
This year-end, more than most, will require some flexibility given the potentially material changes coming down the pike for income taxes. Consider speaking with your financial and tax professionals for additional tax planning.
Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.