Careful tax planning strategies could help taxpayers save in taxes. As business owners, there are six powerful business tax deduction strategies that business owners could understand and implement before the end of tax year 2021.
1. Prepay Expenses Using the IRS Safe Harbor
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS. Under this safe harbor, your 2021 prepayments cannot go into 2023 because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Illustration. You pay $3,000 a month in rent and would like a $36,000 deduction this year. Thus, on Friday, December 31, 2021, you mail a rent check for $36,000 to cover all your 2022 rent. Your landlord does not receive the payment in the mail until probably Tuesday, January 4, 2022. Here are the results:
- You deduct $36,000 in 2021 (the year you paid the money).
- The landlord reports taxable income of $36,000 in 2022 (the year he received the money).
You get what you want, the deduction this year. The landlord gets what he wants, next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
2. Stop Billing Customers, Clients, and Patients
Here is easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2021, assuming that you or your corporation is on a cash basis and operates on the calendar year.
Customers, clients, patients, and insurance companies generally do not pay until billed. Business owners have successfully used this time-tested tax-planning strategy for years by not billing customers and patients.
Illustration. Paul, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. He just postponed paying taxes on his December 2021 income by moving that income to 2022.
3. Buy Office Equipment
With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, it is a great strategy to now buy your equipment or machinery and place it in service before December 31 to get a deduction for 100 percent of the cost in 2021. Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).
4. Use Your Credit Cards
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.
If you operate your business as a corporation, and if the corporation has a credit card in the corporation’s name, the same rule applies: the date of charge is the date of deduction for the corporation.
But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.
5. Do not Assume You Are Taking Too Many Deductions
When your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.
If you just started your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business. Taxpayers used to be able to carry back their NOL two years and get immediate tax refunds from prior years, however, the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, Taxpayers can only carry their NOL forward, and it can only offset up to 80 percent of their taxable income in any one future year.
Taxpayers should never stop documenting their deductions, and they should always claim all their rightful deductions.
6. Your Qualified Improvement Property (QIP)
In the CARES Act, Congress fixed the qualified improvement property (QIP) error that was made when enacting the TCJA. QIP is any improvement made by the taxpayers to the interior portion of a building they own that is non-residential real property – office buildings, retail stores, and shopping centers- if they place the improvement in service after the date, they place the building in service.
The big advantage with QIP is that it is not considered real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2021, taxpayers need to place the QIP in service on or before December 31, 2021.
If a taxpayer has a QIP property on an already filed 2018 or 2019 return, it is on that return as 39-year property. The taxpayer could fix it by amending the return and likely adding some cash to the business bank account because of the fix.
Do you know that you could reduce your tax liability by proper tax planning strategy as individual or business owner?
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