End-of-year taxes are a significant part of tax planning for any business. Even if you’re a sole proprietor with no other employees on your payroll, you can significantly affect the amount of tax you end up paying at year’s end depending on the amount of planning and preparation you put into business tax management.
By planning ahead and paying attention to your taxable business income, it’s possible to take advantage of timely tax breaks, strategically manage your revenue and expenses, and use tax deductions as an incentive to reward both yourself and your employees. Here are six strategies you should use to complete tax planning for your business.
1. Invest in business equipment, supplies, and other assets.
At the end of the fiscal year, businesses can reduce their taxable profits by purchasing equipment, supplies, and other assets that will be used in the coming year.
This can be a great way to reduce your taxes owed in one tax year, especially when you expect that tax year to have a higher taxable profit than the year ahead.
2. Prepay for services you will need the following year.
Similar to investing into business equipment, you may choose to prepay for a number of different services you will use in the coming year. This can include business insurance, professional memberships or association dues, business rent, and other guaranteed, fixed expenses.
3. Write off bad debts that have gone unpaid.
Certain aged, unpaid accounts may be eligible to use as a write-off on your taxes. This is done when an amount owed by a customer has not been paid and is expected to remain unpaid. By writing off this debt, you can reduce your company’s tax burden for the current tax year.
This process involves some potential complications, including the fact that if the customer ends up paying their bill in the future, you have to reverse the write-off you gave yourself on your taxes. To ensure this process is properly handled, it’s best to address bad debts in collaboration with your tax adviser.
4. Accelerate income—or defer earnings—based on profit projections.
When it comes to certain year-end revenues, businesses can use some creative accounts to “accelerate income”—which means claiming revenues early to count them in the current tax year. This is done to claim what you anticipate will be a lower tax rate, saving your business money in the long run.
By contrast, you can choose to defer certain earnings into the next year, which pushes that income into the 2021 calendar year and gives your business some much-needed tax relief for the current tax year—while hopefully saving money on your taxes owed in the long run, if next year’s taxable revenue is lower.
5. Use retirement contributions and bonuses to reduce tax obligations.
At year’s end, some businesses may choose to provide end-of-year bonuses or retirement contributions to their employees, taking advantage of a tax break on these funds. If your business doesn't currently offer a retirement plan, certain tax breaks exist to make this more financially appealing—and the end of the tax year is a great time to set this plan up.
Consult with your tax advisor to make sure this process is handled properly.
6. Pay close attention to changes in small business tax law.
Tax law changes are relevant to businesses in any tax year. For the 2020 tax year, though, legislative changes at state and local levels, including the CARES Act and PPP loans, may offer crucial tax savings—or create restrictions around the types of actions you can take to reduce your tax obligation.
It’s important to be aware of these tax implications when planning out your year-end business taxes. To ensure you capitalize on all tax deductions while steering clear of trouble, you may want to consult with a tax advisor who specializes in business tax law.
Don’t fall victim to short-sighted business tax planning.
Businesses of every size should think ahead when it comes to planning out taxes and reducing how much they owe Uncle Sam. With proactive tax planning, you can account for new tax law changes and take advantage of other business deductions that minimize your taxes owed come Tax Day.
Find a bank that offers business services to support your tax planning and other operations—download our guide, How to Choose the Right Bank for Your Small Business.