As summer comes to a close for all of us, accountants naturally begin to think about the end of the year. For that reason, we’ve compiled a list of six tips business owners can take action on today to reduce the taxes due on 2021 income.
Tip No. 1: Review 2021 performance to date.
Let’s start with the obvious: How has the year gone so far? Is your company meeting or exceeding its revenue goals? As you look at the numbers, are there any costs you can cut entirely or reduce by substituting a high-cost product or service with a lower one? Are you taking advantage of every deduction available to you?
Tip No. 2: Maybe it’s time to go shopping.
As you review your company’s performance, ask yourself if there are items that could spur growth. Make a list, prioritize the items, and consider purchasing the ones you can afford.
Tip No. 3: Take inventory–of your deductions.
In our May newsletter, we wrote about some of the tax treasures hidden in plain sight. Pull out your 2019 return, look at your pre-pandemic write-offs and reacquaint yourself with some of the expenses that may have disappeared during 2020 such as training, attending conferences, client-related meals and entertainment, and car mileage. (Learn more about the return of deductible of meals in our April newsletter.)
Are you taking full advantage of any equipment depreciation? Keep in mind that at the end of 2017, the Tax Cuts and Jobs Act amended the rules related to deducting the cost of “tangible personal property such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property.” Under Section 179, the IRS defines qualified real property as “qualified improvement property, and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.”
As always, there are limits on the type of equipment (vehicles) that qualify, the amount you can deduct, and the rules related to use, so call us if you want to know whether a piece of tangible personal property you purchased this year qualifies for a deduction.
Tip No. 4: Consider changes to your retirement plan or other benefits.
Are you, the owner, getting the most out of your retirement plan contributions? Are you maximizing your salary deferrals from your paycheck? Do you have the option to contribute into a Roth 401K, as you may be able to maximize your contributions into a tax-free growth account? Of course, there are limits to what you may be able to do and there are different types of plans to choose from. We can assist you to design the plan that can get the best bang for your buck. There are also other fringe benefits, such as health and life insurance, for which you may be able to receive a tax-deductible benefit. There are numerous options so we can discuss what may be best for you.
Tip No. 5: Review your business structure.
Every year clients who operate as sole proprietors and LLCs ask us if there’s a way to avoid paying three levels of tax: Federal, state, and self-employment of 15.3%. One answer is to change your business structure to an S-corporation, but at what point do the pros of doing so outweigh the cons? Businesses that operate as S-corps incur payroll costs and higher fees for tax preparation. Yet, the shareholder of an S-corp avoids the self-employment tax on the income received from the S-corporation. If you are operating as an LLC or sole proprietorship, let’s talk about your situation and assess whether it makes sense for you to make the switch.
Tip No. 6: Give yourself a raise!
The federal minimum wage is the topic of a lot of discussion, but did you know that states and some counties set minimum salary requirements for exempt employees? The minimum amount that an exempt individual can earn also varies by the company’s size and industry. For example, in Maryland, the minimum for 2021 is $35,568. In California, it’s $58,240 for employers of more than 25 employees and $54,080 for employers of 25 or fewer employees. (That’s calculated by doubling the minimum wage for non-exempt employees and multiplying that by 2080 hours.) Let’s talk about what salary is appropriate for you.
Where to Put the Cash You Save
When one or more of the Tips described in this newsletter reduces your tax liability for 2021, have you thought about what you might do with your refund? We have.
Fund Your IRA.
There are some great advantages to depositing your refund into a Traditional or Roth IRA. The limit on annual contributions to each is $6,000 (or $7,000 for those 50 years and older), and the primary difference between the two vehicles is tax timing and the types of investment vehicles allowed. (Click here to view a more complete comparison.)
- Traditional IRA
- Qualified contributions are deductible (not taxed). Instead, funds are taxed as they are distributed.
- Investment vehicles limited.
- Roth IRA
- Contributions are taxed as made. All growth is tax-free.
- In a self-directed Roth IRA, you can invest in stocks, bonds, and other vehicles such as cryptocurrency, real estate, precious metals, and hard-money lending.
Keep in mind that your refund is tax-free income today, which you can use to invest in your future. We’re happy to discuss how the pros and cons of each type of IRA impact you.
Buy a Car?
According to Cox Automotive (the parent company of Autotrader, Kelley Blue Book, and Manheim, the world’s largest wholesaler of used vehicles), the market for used cars shows signs of cooling. Its data indicates that the wholesale value of used cars — while far greater than prior years — has fallen for the third consecutive month. That’s good news for car shoppers who turned to the used car market when they encountered high prices and few choices in the new car market. Supply of new cars is limited by a shortage of microchips and supply chain interruptions. Demand in both the new and used car markets is driven by a combination of stimulus cash and a desire to get back to “normal life.”
Some of our clients have decided to wait for the auto market to normalize, others who have used cars to sell or trade are taking advantage of this market, and still, others are looking at the pros and cons of leasing. If you are in the last group, give us a call so we can make sure you meet the IRS’s requirements for a tax deduction.