Be Proactive with Your Tax Planning

The purpose of this is to get the IRS to owe you money.

Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.

With proper tax planning, your income and deductions could become more valuable. For those who use a pass-through entity (Sole Proprietor, S Corp, LLC, or Partnership), your portion of the business profit and deductions are passed through to you and eventually taxed on your own personal tax returns. Taxes are based on your overall household income and filing status.

The 2020 federal income tax brackets are similar to the 2019 brackets, with a few small adjustments for inflation. If you expect to be in a similar or lower tax bracket next year, you may want to try and defer some income into 2020. Likewise, you may also want to move some tax deductions up into 2019. At the very least, these tax-saving strategies can help defer some of your taxes from 2019 to 2020, which will give you a little more time to pay Uncle Sam.

You will want to take the opposite approach if you are expecting to be in a higher tax bracket in 2020. In this case, you would want to accelerate income where possible into 2019. Or, you may want to delay some deductions until 2020. Doing so would mean that you would have more income taxed this year (2019) but end up with an overall lower net tax rate overall for the two years combined.

Here are five powerful business tax deduction strategies that you can easily understand and implement before the end of 2019.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

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 2019 prepayments cannot go into 2021. This makes sense, 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.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So, on Tuesday, December 31, 2019, you mail a rent check for $36,000 to cover all of your 2020 rent. Your landlord does not receive the payment in the mail until Thursday, January 2, 2020. Here are the results:

· You deduct $36,000 in 2019 (the year you paid the money).

· The landlord reports $36,000 in 2020 (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.

Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2019, he would have had to pay taxes on the rent money in tax year 2019.

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2019. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Phil S, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2019 income by moving that income to 2020.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2019.

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 corporate 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. Don’t Assume You Are Taking Too Many Deductions

If 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 are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

Politics aside, minimizing taxation is one of the best ways to increase the net profitability of your small business. Be proactive and work with your certified financial planner and CPA to develop a strategy to make proactive tax planning choices that will help you keep more of your hard-earned money. In the case of retirement accounts, would you rather write a check to yourself or the IRS? The choice is yours.

We trust that you found these ideas above worthwhile. If you would like to discuss any of them or others, please call Crystal Relinski or Amit Chandel on our direct line (562-281-1040) or email us at [email protected].

#accounting #accounting101 #accountingandfinance #accountingfirm #accountingservices #accountingsystem #accountingteam #accountingtips #bookkeeper #bookkeeping #bookkeepinghelp #bookkeepingservices #bookkeepingtips #californiacannabis #cannabis4us #cannabisbusiness #cannabiscommunity420 #cannabisconnoisseur #cannabiscultivation #cannabiscures #cannabisdaily #cannabiseducation #cannabisevents #cannabisextracts #cannabisgrower #cannabisgrowers #cannabisheals #cannabisindustry #cannabislife #cannabislifestyle #cannabislove #cannabislover #cannabismarketing #cannabismedicinal #cannabismedicine #cannabisnews #cannabisnow #cannabisscience #cannabissociety #cannabiz #cannabizconnection #cannabizsummit #cannablog #cannafacts #cannaseur #cannatax #cbdlife #dispensarylife #financialaccounting #getcentered #hempheals #hemphelps #legalweed #marijuanamovement #publicaccounting #recreationalmarijuana #smallbusinessadvice #smallbusinessgrowth #smallbusinesshelp #smallbusinessideas #smallbusinesslife #smallbusinessmatters #smallbusinessservices #smallbusinesssupport #smallbusinesstips #tax #taxation #taxcollection #taxconsultant #taxconsultants #taxconsultation #taxconsulting #taxes #taxeseason #taxfree #taxlaw #taxliability #taxman #taxpayers #taxplanning #taxpreparation #taxpreparer #taxprofessional #taxreform #taxrefund #taxseason #taxstamp #taxtalk #taxtime #taxtips #thetaxcollection #watchusgrow #womenincannabis #womenincannabiz #womeninweed