Most business leaders are thinking strategically as they wind up the calendar year. It’s important that tax planning is part of the reflection, especially in regards to possible tax savings. There are almost always opportunities to reduce your tax liability, and here are 10 areas your business may want to explore.
1. Deferring Income
Since the 2017 Tax Cuts and Jobs Act, pass-through entities are taxed at lower rates. Income deferral is part of business tax planning for some companies. Depending on the expected rate of taxable income, you may benefit from deferring income into 2023. There are a few ways to defer income, including delaying billing, deferring interest and dividends, qualifying dividends, and more.
As with everything we’ll cover here, talk to your tax accountant (or contact the tax team at Strothman) about all your options if you think this is an opportunity for you.
2. Consider the Future: Succession Plan and Gifting Interests
Gifting interests may be part of your intended succession plan or a way to compensate individuals in your closely held family business. This may also be a way to avoid capital gains. There are various valuation discounts as well as a 2022 gift tax exclusion that may be relevant if you gift family business interests before the end of the year.
3. Bad Debts
For businesses using an accrual accounting method, accounts receivable should be evaluated to see if any are partially or totally uncollectible (and can be written off). Identifying bad debts may entitle the taxpayer to a deduction. This possible tax saving opportunity does have to be completed before the end of the year. Keep in mind that any non-business bad debt has to be completely uncollectible and may only be deductible as a capital loss.
4. Current Year Bonuses
In your business, employees may earn bonuses within their annual incentive plan. All bonuses paid before the end of the year are deductible on that year’s tax return. If you are operating on an accrual accounting basis, you may be able to accrue bonuses, paying later but still take the deduction in the current year. This strategic decision would rely on numerous factors in your accounting and business, and should be discussed with a tax professional familiar with your situation.
5. Prepaying Expenses to Accelerate Deductions
A common year-end tax planning strategy is to prepare and pay expenses in advance of December 31, which will provide tax savings in that year. Incurring or paying them after year-end means the tax benefit and deductions from those expenses will be applied in the following year. Certain expenses that are prepaid but incurred in a later year can be eligible for deduction in the year paid.
6. Research and Development Credits
Many businesses don’t realize the host of tax credits and incentives available for research and development activities. You may be unaware that your business participates in qualifying activities, which include innovation/invention, job creation, investments in technology, and more. It would be wise to connect with a tax accountant to investigate the extensive list of possible tax savings for R&D to see if your company has any opportunities for tax savings.
7. Small Employer Pension Plan Startup Cost Credit
If you own a small business and have employees, you may be eligible to claim a nonrefundable income tax credit for expenses associated with establishing a retirement plan for your employees. For business owners who had no pension or retirement plan in place previously, there may be a credit of 50% on qualified administrative and retirement education expenses available for each of the first three years of the plan.
8. Qualified Business Income
Qualified business income (QBI) is a rich area of possibility for tax savings. You may face limitations that keep you from taking a full deduction. We recently encountered this with a client at Strothman: they have a very high net income but low wages. The available 20% deduction on a flow-through entity was limited by this dynamic. It’s a good illustration of why it’s important to have a tax partner you trust, who can walk you through all of your options for setting up and operating your business in a tax smart way.
9. Capitalization of Tangible Property
The tangible items you purchase for your business — such as equipment and tools — can be expensed in the year they were purchased or be capitalized and deducted over the course of several years. Recordkeeping must be current to ensure you understand when you are capitalizing tangible property and assets. The overarching advice we have for clients is to look at your capitalization policy to ensure it is set up in a tax-advantaged way.
10. Inventories of Subnormal Goods
It is likely that any business that deals with physical goods will have obsolete goods in inventory from time to time. Check on these. If you have unsellable or unusable goods that have deteriorated due to damage, wear, style changes, imperfections, broken lots, or similar, they may be deductible as a write off.
New Year: Time to Partner With the Right Tax Advisor
As you reflect on these ideas, know that the right tax advisor will make all of the difference.
At Strothman+Co, our team works tirelessly to ensure that our clients have structured everything the right way and benefit from tax savings opportunities.
As you’re wrapping up the year, don’t hesitate to call: we are here to steer you toward all of the eligible tax savings.