6 top tips for small businesses to nail year-end tax planning

The end of the year means businesses need to start thinking about what they want to achieve next year and set up a formal goal-setting process accordingly. The fourth quarter also calls for some proactive tax planning to lower the tax bill. 

To that effect, check these six year-end tax preparation tips you can take to lower your total taxes owed and take advantage of additional deductions.

Tip 1: Check if your business structure aligns with the current income

– The first step is to review how your business is organized, as this will dictate your tax payments, your personal liability, your ability to raise capital and more. The most common business structures are sole proprietorship, partnership, limited liability company, S corp and C corp, among others.  

As a company and its revenues grow, its structure may also change. Make sure to review yours with your certified financial planner and CPA every couple of years in order to stay ahead of tax planning and other compliance issues. You may need to do this more often if your organization is growing rapidly or if you make any changes to the ownership.

Tip 2: Go over your business retirement plan

– One of the best ways for small business owners to lower their taxes is to set up a retirement plan. Here are three most common retirement plans for small business owners who come under a high income bracket: 

1. SEP IRA

   – Self-employed individuals can contribute 20% of their self-employment earnings into a SEP IRA every year, with a maximum contribution of $58,000 for 2021. Since there is no year-end deadline, a SEP IRA can be set up just before filing taxes for the previous year. With the SEP IRA, employees do not have to count contributions in their gross income, so they’re considered pre-tax income. Note: There are no catch-up contributions for a SEP IRA.




2. Solo 401(k)

   – A Solo 401(k) usually allows for the largest pre-tax contributions, which translates into a lower tax output. The Solo 401(k) is designed for the self-employed or business owners with no full-time employees. As a business owner, you can contribute up to $19,500 for 2021 along with a $6,500 catch-up contribution if you are at least 50 years old. Additionally, the business can make a profit-sharing contribution of up to 25% of payroll. Hence, you can save a total of $58,000 (or $64,500 for those over 50) if you contribute the maximum amount allowed by the IRS ($19,500 for 2021) and your business contributes the maximum allowable amount for payroll.




3. Defined-benefit pension plan

   – If you are looking to save large amounts of tax, a defined-benefit pension plan could be right for you. Combined with a 401(k) profit-sharing plan, your organization could save a few hundred thousand dollars every year. 

Tip 3: See if you are eligible for the home office deduction

– Through the coronavirus pandemic, many small business owners are working from home full-time and may be eligible to take the home office deduction. According to the IRS, in order to qualify to deduct expenses for business use of your home, you must use part of your home: exclusively and regularly as your principal place of business; exclusively and regularly as a place where you meet or deal with patients, clients or customers in the normal course of your trade or business; in the case of a separate structure which is not attached to your home, in connection with your trade or business; on a regular basis for certain storage use; for rental use or as a daycare facility.

Tip 4: Delay all possible income

– Any income received by Dec. 31 has to be included as income for the current year. Deferring income to after Jan. 1 allows you to count it as income for the following year. Depending on how much tax you owe each year, this can save you a significant amount of money. 

Tip 5: Spend money on business items to maximize deductions

– Make a list of expenses you can incur right now to get the most out of your deductions, including making an advance payment to a vendor, upgrading office equipment or stocking up on inventory, among other things. 

Tip 6: Claim first-year bonus depreciation

– The Tax Cuts and Jobs Act allows you to get a 100% first-year bonus depreciation for qualified new and used property that was acquired and placed in service during the 2021 business year.