Now is the time of year for business tax planning. If you own a small business, year-end tax planning is important. In our previous article we wrote about year end tax planning for individuals. Now we’re going to help small businesses learn and save.
What is Tax Planning?
As mentioned in our previous article, it’s when you go over your current year finances so you can make strategic decisions to pay lest amount of tax legally possible. In this article we are going to go over year-end tax planning for small businesses. If you want to review year-end tax planning for individual, we’ve linked the article here.
7 Tax Planning Strategies
These are for people that own a small business. Weather you own single member LLC, S-Corporation, are partner in a business, it doesn’t matter. Below are 7 strategies help all small business owners save money and pay less tax.
1. Employee Retention Credit
If you’re a small business and were affected by COVID, Congress created the Employee Retention Credit (ERC). The ERC is a refundable credit that was created by the COVID Aid Relief, and Economic Security (CARES) Act. It was created to encourage small businesses to keep people employed during COVID. In order to qualify for the ERC you must have paid your employees “qualified wages” during 2020 or 2021. There are special guidelines you need to meet to qualify for the credit. For instance, you can get more money in 2021 than in 2020, but your gross receipts requirement is stricter. Rather than go through all the complicated rules here, we wrote an entire article on it (link here.) Make sure to check with your CPA to see if you’re eligible.
2. 11th Hour Expenses on Credit Cards
If you know you’ve got some large expenses that you are planning on making in early 2022, you should consider making the payments in December so you can write them off now and lower your tax bill.
You can use your company credit card to expense it. In other words, get a deduction now, and pay letter. That’s right. If you use your credit card to make expenses in your business, you can write off the expense when the transaction happens (in December of 2021). And not have to pay off the card until next month, in 2022.
3. Reevaluate your Tax Structure
If you had a crazy-successful tax year, you may want to consider looking at the tax structure you have for your business. Some people are set up on sole-proprietorships or LLCs, and now might be a great time to make a change to an S Corporation. You are allowed to make a late S-Election (that means, your CPA can request your company be an S Corp beginning January 1st, 2021). This is a complicated strategy, so be sure to check with your CPA or tax professional first before making any changes to your company structure.
4. Set Up and Fund a Company Retirement Plan
One of the most popular ways “The Rich” save money is not paying tax. Their #1 tax strategy is using pre-tax retirement plans. In fact, the IRS data shows that US Government loses the most amount of tax dollars in pre-tax retirement funding. If you own a small business, consider setting up a 401(k) or Simple IRA. If you’re a solopreneur (one person business), consider setting up a SEP-IRA or solo 401(k).
These small business retirement plans allow you fund way more than the $6,000 maximum you can fund in a Traditional IRA.
5. Retirement Plan Startup Cost Tax Credit
If you do decide to set up a retirement plan for your company, you may be eligible for a tax credit up to $5,000. Tax Credit are better than deductions because they reduce your taxes dollar-for-dollar. Here’s an example: if you’re in a 30% tax bracket, a $5,000 deduction reduces your tax by $1,500 (30% x $5,000), but a $5,000 tax credit reduces your tax by $5,000K.
The expenses that you can use for the credit are any costs associated with setting up and educating your employees about the retirement plan . Usually, SEP IRAs and SIMPLE IRAs don’t have setup costs, but 401(k)s usually do.
To claim the credit, your business must meet some basic requirements:
- Your business has less than 100 employees
- At least one of your employees is not a 5% owner (or their relatives)
- At least one of your employees made less than $130,000 in 2021
In other words, to get the credit, your company must have less than 100 employees, and the employees that count can’t be owners, their relatives, and eligible employees must make under $130K. Check with your CPA to see if you’re able to get this credit.
Strategies for Cash Basis Businesses
What is a Cash-Basis taxpayer? There are two main types of accounting methods: Cash Basis and Accrual Accounting. To keep it simple, Cash Basis is when you report the income when money is received, and report expenses when they are actually paid. Accrual Accounting is when you report your income and expenses when you’ve incurred them (if you want to know more about the differences, we wrote an article about it here).
These next two strategies only work for business that are on the Cash Basis
6. Hold off on Invoicing Until 2022
Another tax strategy is holding off sending bills to clients until January. When you’re running a business and you finish your work you’d like to get paid as quickly as possible (we all do). However, if you’re not stressed for the money right away, consider sending your invoice next year so you don’t have to drag that money into income right away.
7. Prepay 2022 Expenses Now
If your makes any payments the first few days of the year (rent, commission residuals, etc.) You should consider making those payments in late December to take advantage of the deductions in 2021 instead of 2022. Keep in mind, this only works if your business is on the Cash Basis. If you use Accrual Accounting, you’re out of luck.
If you own a business, this is the time of year to look for strategies to lower your taxes. If you wait until January, it may be too late. Here is a link to our article on Tax Planning Strategies for Individuals.