Can you believe the end of the year is just around the corner? Now is the time to plan for 2020 taxes! Let’s go over 7 helpful last-minute business tax deductions to help you reduce your 2020 taxes.
7 last-minute business tax deductions
1. Prepay Expenses Using the IRS Safe Harbor
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. Pretty sweet deal, right?
Under this safe harbor, your 2020 prepayments cannot go into 2022 because you can only prepay 12 months of qualifying expenses.
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.
Now’s the time to renew your insurance or get a policy if you don’t already have one.
Example: You pay for a year for your insurance which costs $1,000. You can even apply this to software where you can pay annually vs. monthly. There are quite a few instances where this might apply. Take a look and see what you can find.
You get what you want—the deduction this year.
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, 2020. (assume here that you or your business 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. Jim usually bills his clients before doing any work. However, in December, he sends no bills. Instead, he gathers up those bills and sends them the first week of January. Presto! He just postponed paying taxes on his December 2020 income by moving that income to 2021.
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 2020.
You can buy that fancy camera you’ve been wanting or even a new laptop. Maybe there’s another expensive piece of equipment you’ve been wanting and have been putting off. Well, now’s the time to get it.
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.
While I’m not normally an advocate of having a big credit card bill, this could help as long as you pay off the balance in January to avoid the high interest of most credit cards.
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 for the deduction even with a corporation or partnership.
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.
This reimbursement can include the use of a personal vehicle for the business. As long as you’ve tracked business miles, your corporation or partnership can reimburse you personally for business miles. You’d use the IRS standard deduction rate which changes every year. For 2020, it is 57.5 cents.
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 (TCJA) 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.
6. Thank COVID-19
Let’s be real: there’s little to be grateful for with COVID-19, with one of the several exceptions being the potential opportunities to turn NOLs into cash for your business.
Two NOL opportunities come from the Coronavirus Aid, Relief, and Economic Security (CARES) Act:
1. The CARES Act allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years for refunds against prior taxes.
2. The CARES Act allows the application of 100 percent of the NOL to the carryback years.
Before the CARES Act, you could not carry back your 2018, 2019, or 2020 losses, and your NOL could offset only up to 80 percent of taxable income before your Section 199A deduction.
7. Contribute to a tax-advantaged retirement plan or health savings account
If you’re a W2 employee, pretax contributions to a traditional 401(k) or similar workplace retirement plan could reduce your taxes by the amount of your total contribution for the year multiplied by your marginal tax rate.
For example: If you’re in the 22% tax bracket, you could save $220 in current-year federal taxes for every $1,000 you contribute, up to the 2020 limit of $19,500.
However, you have only until December 31, 2020, to make the contribution count for this year. Now is the time to contact your employer to bump up your contributions for this year. The maximum you can contribute to a 401(k) for 2020 is $19,500. If you’re age 50 or older, you can contribute an extra $6,600, for a maximum contribution of $26,000.
Plan ahead: With the end of the year approaching, you may not be able to increase your 401(k) contributions sufficiently to maximize your tax savings. The best way to avoid having the same thing happen next year is to notify your employer now that you want to increase your automatic deferral percentage for 2021.
If you’re self-employed…
A traditional IRA and a Simplified Employee Pension (SEP) IRA offer potential tax breaks similar to those of a 401(k). However, you have until the tax filing deadline to make a contribution that applies to your 2020 tax return as long as the plan is set up. The maximum IRA contribution for this year is $6,000 for eligible taxpayers under age 50, and $7,000 for those 50 and older. SEP contributions by self-employed individuals are limited to $56,000 or 25% of eligible income, whichever is less.
Plan ahead: If you expect to be in a higher bracket in retirement, you may want to consider whether converting all or a portion of a traditional IRA to a Roth IRA makes sense. Generally, you’ll have to pay current-year tax on the converted amount. But if the conversion won’t push you into a higher tax bracket, the potential benefit of tax-free withdrawals from a Roth IRA when you retire might make the one-time higher tax payment this year worth it. Contact your tax advisor regarding your individual situation.
Still have questions about what counts as a business write-off? Download the Tax Write Off Cheat Sheet.
Understand your business deductions as an RV entrepreneur