The end of the year is officially upon us, and that means there are just a few weeks left to take proactive steps to lower your 2019 tax bill. While we can always delay filing taxes if we have to, most tax-saving moves need to be made before the end of the calendar year. Here are three last minute tax strategies small business owners should consider before the clock strikes midnight on January 1.
Aside from just getting organized, small business owners should consider the following:
- Establish a retirement plan.
Establishing a retirement plan is one of the best ways for small business owners to reduce their taxes -- fast.
Confused about what’s available to small business owners? Here’s a crash course:
A SEP IRA is for the self-employed. Taxpayers can contribute 20% of their self-employment earnings into a SEP IRA each year, up to $56,000 for 2019.
There are no catch-up contributions for SEP IRAs.
A huge benefit to the SEP IRA is that there is no year-end deadline, so you can set it up just before filing your taxes for the previous year if it will help to offset taxes.
A Solo 401(k) typically allows for larger pre-tax contributions, which should translate into fewer taxes being owed. Business employees are allowed to contribute up to $19,000 for 2019 plus a $6,000 catch-up contribution if they are at least 50 years old. Additionally, the business will be able to make a profit-sharing contribution, up to 25% of payroll. That means a grand total of $56,000 (or $62,000 for those over 50) could be saved provided the individual contributes the maximum amount allowed by the IRS ($19,000 for 2019), and the business contributed the maximum allowable amount for payroll.
Note that a 401(k) plan must be set up during the tax year, but some funding can be done later.
For those needing huge tax savings, a defined-benefit pension plan is worth investigating. These plans can be combined with 401(k) profit-sharing plans, which could translate into massive tax savings.
Note that pension plans are very complicated and time-consuming to set up, but they can be worth it. Reach out immediately if you’d like to discuss this further.
- Claim First-Year Bonus Depreciation.The Tax Cuts and Jobs Act (TCJA) provided a 100% first-year bonus depreciation for qualified used and new property that was acquired and placed in service during the 2019 business year. That means you may be able to get a tax break for the entire cost of assets purchased in 2019. So, if you are having a big income year and have the money to spend, you may want to consider moving up some planned purchases into 2019 -- particularly if they are big purchases.
- Plan ahead for 2020 (because 2020 taxes will be pretty predictable).Major tax changes in 2020 are highly unlikely in our opinion. That’s because most of the changes made by the TCJA are set to expire in 2025, and it’s highly unlikely we’ll see a major tax overhaul at the end of 2020 -- even if we do elect a new president and shift the balance of power in Congress. Newly elected officials won’t take office until January 2021, and outgoing officials won’t be scrambling next December to make retroactive tax changes. 2020 should be a relatively quiet tax year.
(After 2020, all bets are off, as those running for election/re-election now will seek to make good on their promises for future tax law changes.)
For those who use a pass-through entity (Sole Proprietor, S Corp, LLC, or Partnership), remember that 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 your tax bill.
If you are expecting to be in a higher tax bracket in 2020, you’ll want to take the opposite approach -- accelerating income where possible into 2019 or delaying some deductions until 2020. Doing so would mean that you would have more income taxed this year (2019) but you could end up with an overall lower net tax rate overall for the two years combined.As always, consult with your BGW team before making such decisions.
There’s no better way to quickly increase the profitability of your small business than to minimize your tax burden. Let’s work together over the next few weeks to keep more money in your pocket.