Scroll with the word 'tax' on it and magnifying glass. Tax-planning guide, checklist.

5 Tax-planning tips before the end of the year

By: Hiscox Blog

It feels like ‘tax season’ just ended, but now is the time to start planning for next year. There are steps you can take now to reduce your small business’s tax liability when you file your 2020 taxes in April, and ways to make the whole process easier.

Tax-planning tips to help you prepare

1. Spend some money

If you have the cash and know you will have upcoming expenses, try to pay them now. Buy that new printer or desk chair before the end of the year and you can write it off on your 2020 taxes. Paying outstanding invoices before December 31 is a good strategy, too. The more things you can pay for now, the less income your business will show on your 2020 taxes.

2. Defer income

Just like having more expenses, having less income means paying less in taxes. The more income you can push off into calendar year 2021, the less you’ll have to pay in 2020 taxes. If you can do so, postpone invoicing customers until after the first of the year so that income is recognized next year. If you sell to other businesses, keep in mind that your customers may want to pay in 2020 so they can claim the expense this year. You may have to weigh the benefit of keeping your customer happy against deferring the income.

3. Review your financial statements

Too often, business owners wait until April to look at their year-end financial statements. But looking at them now can give you insight into what you can do before the new year to reduce your tax burden.

Here’s one thing to pay attention to if your service business is a ‘pass-through’ business (e.g., a sole proprietorship or an S Corp). For pass-throughs, you can deduct 20% of qualified business income when you calculate your federal taxes, but this deduction is phased out for some types of businesses, like legal, medical, and accounting practices. If your personal income exceeds $326,600 for joint filers (or $163,300 for single filers), you’ll start to see this 20% deduction reduced. It’s eliminated completely for joint filers who have income over $426,600 and single filers with income over $213,300.

4. Fund a retirement plan

Employer retirement plan contributions reduce a business’s income, so if you have a plan and are able to make contributions, do so before the deadline. Depending on the type of plan, the deadline for contributions may be the tax filing deadline, so you may have until April 15, 2021 to make tax year 2020 contributions.

If you don’t have a retirement plan, consider setting one up. There are several types to choose from, and many can still be set up for 2020.

5. Understand PPP tax implications

If your business received a Paycheck Protection Program (PPP) loan, the loan proceeds are not taxable. However, if you paid payroll expenses with the loan proceeds, you cannot deduct those expenses from your business income. This can get complicated, so you may want to consult a tax advisor to make sure you’re following the rules.

Another unusual circumstance this year concerns the option for businesses to defer payroll taxes in order to boost employees’ take-home pay. If you chose to do this, half of the employer’s share of the deferred taxes needs to be paid by December 31, 2021 and the second half by December 31, 2022. You can also pay them sooner if you want. Your tax advisor should weigh in on how to plan for this liability.

This has been a year like no other, and next year’s tax season is likely to be more stressful than usual. But getting a handle on potential issues while minimizing income and maximizing deductions can help.