There’s still time for business owners to cut their 2021 tax bill — here’s how

Declare 100% first-year bonus depreciation for late-breaking asset additions

Because of the 2017 Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation is on the market for certified new and used property which might be positioned in service (put into enterprise use) in calendar yr 2021. Meaning your small business may be capable of write off the complete value of some or all your 2021 asset additions on this yr’s federal revenue tax return and perhaps on the state return too.

So, take into account making extra acquisitions between now and December 31. Contact your tax professional for particulars on the 100% first-year bonus depreciation break and precisely which property qualify.

Caveat: If important tax-rate will increase are enacted for 2022 and past, you may be higher off forgoing 100% first-year bonus depreciation and as an alternative depreciating newly acquired property over a lot of years. If tax charges go up, these future depreciation write-offs could possibly be value greater than a current-year 100% write-off. Luckily, you’ve gotten till the deadline for submitting your current-year federal revenue tax return, together with any extension, to resolve which course to take. If your small business makes use of the calendar yr for tax functions, the prolonged submitting deadline is 10/17/22 for a sole proprietorship’s Kind 1040 or a C company’s Kind 1120. The prolonged deadline is 9/15/22 for a partnership’s Kind 1065, an LLC taxed as a partnership’s Kind 1065, or an S companies’ Kind 1120-S. So, I like to recommend extending your return to have most flexibility to react to developments.

Declare 100% first-year bonus depreciation for late-breaking actual property certified enchancment property (QIP) expenditures

The 100% first-year bonus depreciation break can also be obtainable for business actual property certified enchancment property (QIP) that’s positioned in service this yr. QIP is outlined as an enchancment to an inside portion of a non-residential constructing that’s put in after the date the constructing was positioned in service. Nevertheless, QIP doesn’t embrace expenditures: (1) to enlarge a constructing, (2) for any elevator or escalator, or (3) for any inside structural framework of a constructing.

Caveat: Identical as above.

Write off new or used heavy SUV, pickup, or van

The 100% first-year bonus depreciation break can have a giant tax-saving impression for brand spanking new and used heavy automobiles used over 50% for enterprise. That’s as a result of heavy SUVs, pickups, and vans are handled for federal revenue tax functions as transportation gear. In flip, which means they qualify for 100% first-year bonus depreciation. Particularly, 100% bonus depreciation is on the market when the SUV, pickup, or van has a producer’s gross car weight ranking (GVWR) above 6,000 kilos. You possibly can confirm a car’s GVWR by trying on the producer’s label, which is often discovered on the within fringe of the driving force’s facet door the place the door hinges meet the body. If you happen to’re contemplating shopping for a heavy car, inserting it in service earlier than yearend may ship a giant write-off on this yr’s return.

Caveat: Ditto.

Micromanage enterprise revenue and deductions for multi-year tax financial savings

If you happen to conduct your small business utilizing a pass-through entity — which means a sole proprietorship, S company, partnership, or LLC taxed as a partnership — your shares of the enterprise’s tax objects are handed via to you and mirrored in your private Kind 1040. So, any passed-through internet revenue might be taxed at your private federal revenue tax charges. These charges could or might not be increased subsequent yr, and chances are you’ll or could not know the reply by the top of this yr. So, for 2021 yearend tax planning functions, you possibly can solely place your bets, act accordingly, and hope for the most effective.

If, as yearend approaches, you optimistically imagine you can be in the identical or decrease federal revenue tax bracket in 2022, the standard technique of deferring taxable revenue into subsequent yr whereas accelerating deductible expenditures into this yr is sensible. Deferring revenue and accelerating deductions will, at a minimal, postpone a part of your tax invoice from 2021 till 2022. See beneath for some methods to defer revenue.

Then again, in case you count on to be in the next tax bracket in 2022, take the alternative strategy. Speed up revenue into this yr (if doable) and postpone deductible expenditures till 2022. That approach, extra revenue might be taxed at this yr’s decrease price as an alternative of subsequent yr’s increased price.

Recommendation: As yearend attracts nigh, we should not find out about subsequent yr’s tax charges. So be able to make last-minute tax planning strikes proper up till the large ball begins its descent. If we all know subsequent yr’s tax charges sooner, nice. However don’t depend on it.

Maximize deduction for pass-through enterprise revenue

The deduction based mostly on a person’s certified enterprise revenue (QBI) from pass-through entities was a significant component of the TCJA. The deduction will be as much as 20% of a pass-through entity proprietor’s QBI, topic to restrictions that may apply at increased revenue ranges and one other restriction based mostly in your taxable revenue. For QBI deduction functions, pass-through entities are outlined as sole proprietorships, single-member LLCs which might be handled as sole proprietorships for tax functions, partnerships, LLCs which might be handled as partnerships for tax functions, and S companies.

You can too declare the QBI deduction for as much as 20% of certified REIT dividends and as much as 20% of certified revenue from publicly-traded partnerships.

Due to the restrictions on the QBI deduction, tax planning strikes (or non-moves) can unexpectedly improve or lower your allowable QBI deduction. For instance, yearend strikes that cut back this yr’s taxable revenue can have the damaging facet impact of decreasing this yr’s QBI deduction. Work together with your tax professional to optimize your tax final result.

Recommendation: As soon as once more, be able to make last-minute strikes proper up till December 31.

Set up a tax-favored retirement plan

If your small business doesn’t have already got a retirement plan set as much as profit you, now may be the time to make the leap. Present retirement plan guidelines enable for important deductible contributions. For instance, in case you’re self-employed and arrange a SEP-IRA, you possibly can contribute as much as 20% of your self-employment earnings, with a most contribution of $58,000 for 2021. If you happen to’re employed by your individual company, as much as 25% of your wage will be contributed to your account, with a most contribution of $58,000. If you happen to’re within the 32% federal revenue tax bracket, making a most contribution may minimize what you owe Uncle Sam for 2021 by a whopping $18,560.

Different small enterprise retirement plan choices embrace the 401(okay) plan which may even be arrange for only one particular person (a so-called solo 401(okay)), the outlined profit pension plan, and the SIMPLE-IRA. Relying in your circumstances, these different sorts of plans could enable greater deductible contributions.

Because of a change made by the 2019 SECURE Act, tax-favored certified worker retirement plans, apart from SIMPLE-IRA plans, can now be adopted by the due date (together with any extension) of the employer’s federal revenue tax return for the adoption yr. The plan can then obtain deductible employer contributions which might be made by the due date (together with any extension), and the employer can deduct these contributions on the return for the adoption yr.

Key Level: This SECURE Act doesn’t change the deadline to determine a SIMPLE-IRA plan. It stays October 1 of the yr for which the plan is to take impact. Additionally, this SECURE Act change doesn’t override guidelines that require sure plan provisions to be in impact throughout the plan yr, such because the provisions that cowl worker elective deferral contributions (salary-reduction contributions) beneath a 401(okay) plan. The plan should be in existence earlier than such worker elective deferral contributions will be made.

Instance: The deadline for organising a SEP-IRA for a sole proprietorship enterprise that makes use of the calendar yr for tax functions and making the preliminary deductible contribution for the 2021 tax yr is 10/17/22 in case you lengthen your 2021 Kind 1040 to that date. The deadline for the deadline contribution on your 2021 tax yr can also be 10/17/22. Nevertheless, to make a SIMPLE-IRA contribution for the 2021 tax yr, you will need to have arrange the plan by October 1. So, you might need to attend till subsequent yr if the SIMPLE-IRA possibility is interesting.

Recommendation: When you have till subsequent yr to determine a tax-favored retirement plan (apart from a SIMPLE-IRA), why not simply get it completed this yr as a part of your yearend tax planning drill? Contact your tax professional for extra data on small enterprise retirement plan alternate options, and remember that if your small business has staff, you will have to make a contribution for them too.

The underside line

The yearend tax planning strikes outlined right here may transform higher or worse concepts, relying on what occurs in DC. I’m guessing there received’t be any damaging retroactive tax modifications that take impact this yr, and that any damaging modifications scheduled for future years received’t be as costly as some of us assume. In different phrases, I’m semi-optimistic. Am I nuts? Time will inform. Keep tuned.

Sidebar: The right way to defer enterprise taxable revenue

Most small companies are allowed to make use of cash-method accounting for tax functions. Assuming your small business is eligible, cash-method accounting means that you can micro-manage your 2021 and 2022 enterprise taxable revenue as a way to, hopefully, decrease taxes over the two-year interval. Say you count on your small business revenue might be taxed on the identical or decrease price subsequent yr. I hope you’re proper. With that huge assumption in place, listed here are particular cash-method strikes to defer some taxable revenue till 2022.

• Cost recurring bills that you’d usually pay early subsequent yr on bank cards. You possibly can declare 2021 deductions despite the fact that the bank card payments received’t truly be paid till 2022.

• Pay bills with checks and mail them just a few days earlier than yearend. The tax guidelines say you possibly can deduct the bills within the yr you mail the checks, despite the fact that they received’t be cashed or deposited till early subsequent yr. For large-ticket bills, take into account sending checks through registered or licensed mail, so you possibly can show they had been mailed this yr.

• Earlier than yearend, prepay some bills. So long as the financial profit from the prepayment doesn’t lengthen past the sooner of: (1) 12 months after the primary date on which your small business realizes the advantage of the expenditure or (2) the top of the subsequent tax yr. For instance, this rule means that you can declare 2021 deductions for prepaying the primary three months of subsequent yr’s workplace hire or prepaying the premium for property insurance coverage protection for the primary half of subsequent yr.

• On the revenue facet, the final rule for cash-basis companies is that you simply don’t need to report revenue till the yr you obtain money or checks in hand or via the mail. To benefit from this rule, take into account ready till close to yearend to ship out some invoices to prospects. That may defer some revenue till 2022, since you received’t acquire the cash till early subsequent yr. In fact, this concept solely is sensible on your best-paying prospects.