Year-end tax planning strategies for businesses
If you have made a profit projection for the year and your taxes are going to be higher than you had anticipated, there are several strategies that you may want to consider to reduce your income taxes.
Quit billing customers and patients. Customers and patients can’t pay when they haven’t been billed. By accumulating the December bills and sending them in early January, you can avoid paying taxes on one month’s income.
Use the IRS Safe Harbor to prepay your expenses. IRS Regulation 1.263(a)-4(f) contains a safe harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenditures up to 12 months in advance without challenge by the IRS. Qualifying expenses include rent payments on offices, lease payments on vehicles, and business insurance. If the advance amount of rent paid will cause a problem for your landlord, you can mail the advance rent on December 30. By mailing the advance rent on December 30, you get to deduct it in the current year. Your landlord will get what he wants, advance rent in the year he expected it. He won’t claim the rental income a year early because he won’t receive it until January. It’s a good idea to send the advance check by certified mail so that you can prove the date you mailed it to the IRS.
Buy equipment at the end of the year. You can deduct the purchase of the equipment even if you haven’t paid for it yet. As long as you signed a contract, you may be able to deduct the entire purchase. Claiming the Sec. 179 deduction allows you to deduct the cost of the asset in the year of purchase rather than depreciating it over a number of years. The maximum Sec. 179 for 2019 is $1,020,000. Special rules apply for the purchase of vehicles with a weight rating of 6,000 pounds or less. You should research the details of vehicle depreciation before making a purchase.
Pay your children that are under the age of 18 for business chores. They will be exempt from payroll taxes (Social Security and Medicare). Your child’s wages will have to be reported on a W-2 rather than a 1099. Giving your child a 1099 will eliminate the payroll tax benefits because they would be required to pay self-employment taxes.
The standard deduction for single filers in 2019 is $12,200. Consequently, your child can earn up to $12,200 without paying any income tax. There are rules that you will need to follow to avoid problems with the IRS. Your child must be paid reasonable wages for services actually rendered. Your child should complete a daily timesheet. You should research all of the rules and forms required before hiring your child.
David Zubler has an accounting degree and computer science degree and has experience as an accounting manager and controller in manufacturing, and has owned his tax/consulting business since 1990. David Zubler is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org.