BUSINESS OWNERS - YEAR END TAX SAVINGS TIPS

Last updated 20 November 2020

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  1. Buy Business Equipment

If you have need to buy some new business equipment for use in your business--whether it be a computers, printers, software, car or truck or anything else--Get It Done BEFORE the end of the year. With current tax laws (under TCJA) you’ll likely be able to deduct the entire amount you paid for the item in a single year instead of having to depreciate it over several years (exception for passenger cars, however, for which annual deductions are capped).

IRC Code Section 179 allows you to deduct in one year most tangible personal property you purchase and use over 51% of time for your business. The annual limit for this deduction is $1 million under the TCJA. Under this provision you can never deduct more than your net taxable business income for the year.

Use this extremely generous first year tax deduction for Business Property Purchases!!!

  1. Establish and Fund Retirement Plans

Retirement plans are a great place where successful self-employed people are often better off than employees. The government allows the self-employed to set up retirement accounts specifically designed for small business owners. These accounts provide enormous tax benefits--tax deductions for plan contributions and tax deferral on investment earnings until retirement. You should look at the array of retirement accounts available--solo 401(k)s, IRAs, SEP-IRAs, Simple IRAs, and Keogh plans. Depending on your age you can also explore a Cash Balance account.

The amount you contribute each year depends on the type of plan you have and the amount of your net earnings from self-employment. As an example, the maximum contribution for a solo 401(k) plan is 20% of your net self-employment earnings plus an elective deferral contribution of up to an annual threshold amount. The IRS website has the annual contribution limits.

Remember that these contributions do not have to happen until your tax return is due so if you file an extension you have until that extension is due. Remember, however, that you must establish a solo (401)(k) by December 31st to take deductions for your contributions in that year.

  1. Donate to Charity

Donations to charity have always helped but with the increased Standard Deductions under the TCJA I have talked with most of my clients about how to maximize your itemized deductions. By itemizing you'll lower your income taxes by donating to charity by the end of the year.

Because of the increased Standard Deduction you might consider alternating years with your Charitable dontations. If your itemized deductions are over the Standard Deduction (e.g. up to 5K over) and your Charitable donations are equal to or greater than that amount you should talk with your tax advisor about the benefits of alternating years in which you donate to Charity. By so doing, the year you donate (you would donate double) putting you well over the Standard. Then in the year you don't donate, you are well under but you still take the Standard Deduction.

Donations can be cash, property, stocks, or property. Make sure the charity is 501(c) (3) (Public Charity) Churchs and Religous organizations are good examples.

  1. Open an HSA

Do you have a Health Savings Account (HSA) for you as a self-employed person? You are paying for your health insurance so you should consider opening a HSA. An HSA is like a health IRA that is coupled with a health insurance policy with a high deductible. (1) You deduct the contributions to your HSA and then use that money to then pay for any uninsured health-related expense. Best of all - you do NOT pay any taxes on those HSA withdrawals. If you haven't set it up already, quickly do so (before 31 Dec) since you can take a full year's worth of deductible HSA contributions. It takes time to set these up so don't wait past the 20th of December. Be mindful of the annual limits.

  1. Sell Those Stock that are Dogs!!!!!

Most investors have some stocks that have gone down in value since you purchased them. Sell enough of them before year-end (at least 3K). The 3K target is key since if your total capital losses exceed all your capital gains for the year you may deduct up to $3,000 of these losses from your ordinary income--that is, the income you make from your business. If your overall capital loss is more than $3,000, the excess carries over to the following year.

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