This has been a great year for our company, posting profits we never anticipated. But that makes us nervous about tax season. What can we do to offset these gains?
Great question! Truth be told, being proactive and doing tax planning throughout the year is the best thing to do. You may have been able to offset more of your tax liability had we addressed this earlier, but better now than never! Here are three strategies to consider.
Time your income & expenses
When it comes to year-end tax reduction strategies, many businesses that use cash-basis accounting start with the practice of accelerating deductions into the current tax year and deferring income into the next year. Accelerating deductions could be paying bills or employee bonuses due in 2023 before year-end or deferring income by holding off on invoicing until early January.
Maximize your QBI deduction
Certain self-employed individuals and owners of pass-through entities (that is, sole proprietors, partnerships, LLCs, and S corporations) can deduct up to 20% of their qualified business income (QBI), subject to certain limitations based on W-2 wages paid, the unadjusted basis of qualified property and taxable income. The deduction, created by the Tax Cuts and Jobs Act (TCJA), is set to expire after 2025, so make the most of it while you can.
If the W-2 wage or property limits are capping your deduction, you could increase your deduction by increasing wages or accelerating the purchase of capital assets. Of course, these moves usually have other consequences, such as higher payroll taxes, that you should weigh with all other business considerations before proceeding.
Accelerate depreciation
The TCJA also increased the Section 168(k) first-year bonus depreciation to 100% of the purchase price, through 2022. Beginning next year, the allowable deduction will drop to 80% of the purchase price, then by an additional 20% each subsequent year until it evaporates altogether in 2027 (again, absent congressional action). Combining bonus depreciation with the Section 179 deduction can produce substantial tax savings for 2022.
Under Sec. 179, you can deduct 100% of the purchase price of new and used eligible assets in the year you place them in service — even if they’re only in service for a day or two. Eligible assets include machinery, office and computer equipment, software, and certain business vehicles. The deduction also is available for some improvements to nonresidential property.