Tax planning strategies must be executed before the end of the tax year. If you’re going into the end of 2021 and know that you’ll be facing a large tax burden, you still have time to reduce what you pay to the IRS.
Reducing taxable income as a business is always possible, but you need to take action now.
Time is ticking.
6 Tax Planning Strategies to Save Money on Your 2021 Taxes
1. Defer Income
You’re required to pay taxes on your income, and this allows you to use one of the most utilized strategies available: deferment or postponement. Since you want to minimize your tax liability for the current year, this strategy makes sense.
If you’re owed money, wait until the end of December to send out your invoices. The goal is to send the invoice out late enough in the process that you won’t receive payment until after the New Year.
However, you only want to use this strategy with:
- Customers you trust
- Businesses you’ve worked with for a long time
Deferring income may not be beneficial for the buyer, so if they push you to receive the invoice, they likely want to deduct the expense from their taxes. In this case, it’s often best to send the invoice and save the business relationship.
2. Accelerate Expenses
Expenses allow you to reduce your taxes significantly, but this doesn’t mean that you should go out and buy the equipment you’ll never need. Instead, what you’ll want to do is the following:
- Look ahead to expenses in January and send out a check for the expense a few days before the end of the year. You can deduct expenses (in this case, the money from the check) as long as it’s sent within the year, even if it’s not cashed. Ideally, send the check via certified mail to have proof that you mailed the check before the year’s end.
- Pay recurring expenses in advance to help reduce your tax burden.
- Purchase equipment or assets that you plan on buying in the near future now. You’ll reduce your taxes and have new equipment that you can begin depreciating the following year.
When you pre-pay for expenses, there are laws in place that can stop you from paying for more than 12 months in advance. You’ll want to keep this rule in mind if you’re doing your own taxes, or at least tell your accountant that you used this strategy to avoid any issues.
3. Maximize Pre-Tax Retirement Savings
Tax planning also involves retirement savings. Owners of a business will want to consider maximizing their pre-tax retirement savings accounts to reduce their income for the year. However, businesses can also reduce their taxes if they offer a 401(k) plan.
You can deduct employee benefit costs, and this means that you can maximize contributions to all employees.
Additionally, you can write off the costs for the following:
- Auditor
- Recordkeeper
- TPA
Owners who are worried about their individual tax burdens can also contribute to their own retirement accounts, such as a 401(k) and traditional IRA.
4. Clean Out Your “Closet and Garage” for Charitable Contributions
Charitable contributions can be made and deducted as long as they’re not contributions to:
- Private organizations
- Political organizations
However, the IRS has specific rules in place to protect against fraud or misuse of this part of the tax code. Essentially, your business cannot donate services. However, if you have to travel to make the donation, such as transporting an old piece of equipment to a qualified charity, you can deduct this expense from your taxes.
If you benefit from the contribution in any way, you cannot deduct it from your taxes.
Many businesses have goods in their warehouses that take up space or pay for these items to sit in storage.
Donating them will help you reduce your tax burden and also free up expenses relating to storage. However, you want to do this as soon as possible because we are quickly coming to the end of the year.
Working with a tax professional can help you develop some very interesting ways to make charitable contributions.
5. Start Working on Loss Harvesting
Loss harvesting is a strategy that businesses can use when they have investments. Essentially, what you’ll be doing is selling off investments at a loss. Since you’re selling at a loss, you can deduct the loss through your taxes.
It’s crucial to do this strategically because you never want to let go of an investment that will turn right back around and double in value.
With that said, if your business owes capital gains taxes, loss harvesting can help you minimize the taxes on these gains.
6. Accelerate Depreciation
Equipment and assets depreciate over time, and one of the most utilized tax planning strategies is to accelerate this depreciation as much as possible. For example, you can depreciate the value of assets over time for long-term tax savings. However, if you need to fall into a lower tax bracket or lower your tax liability, you can claim an instant depreciation, too.
This tactic can only be utilized on eligible assets, but it can be used on new and used assets, so keep this in mind.
You can:
- Purchase non-real, qualifying property before December 31
- Write off the depreciation on your upcoming taxes
Since there are a lot of rules and nuances surrounding accelerated depreciation, we do suggest working with a tax professional – like us – to help you with this point.
Final Thoughts
Reducing your tax burden is fun – for you and us. When you run a business, you can often use the savings you recuperate and funnel them into investments that can make you a lot of money. Working on a tax strategy late in the year is common, but we like to start early in the year.
Tax planning is a strategic way to pay less in taxes and keep more money in your business.
If you use any of the tactics above, we also recommend starting in the first quarter of 2022 to work on your tax strategy for next year.
Click here to discuss custom tax strategies for businesses and reduce your tax burden.
