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End-of-year tax planning: 7 clever moves for your small businesses

Posted by Kanika Sinha

November 22, 2022

As a small business owner, there’s not much you can do to keep operating expenses down or to stop interest rates from climbing. But you have more control when it comes to another financial pain point that can significantly impact your business’s profits — your taxes. 

Proper tax planning now could lead to a significant reduction in your 2022 taxes, which can improve your bottom line and ultimately help you funnel more money to where it matters most: Growing your business. 

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Back to basics


What is tax planning? Investopedia defines tax planning as “the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible.” It encompasses tax savings strategies such as utilizing all available tax deductions, appropriately timing expenditures and investing in your employees to reduce overall tax liability.

Why is year-end tax planning important? Tax planning helps you make smarter business decisions and establishes a clear direction for your organization. Ideally, it should be done year-round, especially given that the government periodically amends the tax code.

However, accountants and finance professionals reiterate that the fourth quarter is the most critical time of year for tax planning. It’s your last opportunity to make a major impact on your tax liabilities when filing your annual tax return.

Besides, the end of the year is a good time to examine your small business’s overall financial situation and plan strategies to enhance your long-term planning.

Top 7 tips for tax planning at year end


Tax planning between now and December 31 can have a significant impact on how much small business tax you must pay in April 2023. Here are some savvy year-end tax planning moves to consider.

1. Defer your business income until January (2023)


It comes as a surprise to nobody that the bigger your business’s bottom line, the bigger your tax bill. So, one of the best tax-planning strategies is to reduce your current year’s income by deferring it to the next year.

For instance, if you are a small business using cash basis accounting and have year-ending invoices to send or accounts receivable to chase, consider delaying them until January 2023. As income is taxed in the year it is received, any business income you postpone until Dec. 31 won’t be taxable until 2024 (meaning you’ll not have to pay taxes on it for another year).

2. Review your business entity type


Many small businesses start as a sole proprietorship because it’s an easy and affordable structure to implement. However, a sole proprietorship isn’t always the most suitable business entity from a tax perspective.  

Sole proprietorships are considered “pass-through” entities by the IRS, meaning the business itself isn’t taxed separately. Business income or losses are passed through to the owner and reported on their individual tax return. 

Since pass-through entities, which also include partnerships and limited liability companies, pay no entity-level tax, the business pays taxes at the owner’s personal rate. Based on your personal income tax bracket, this could result in higher taxes.

On the other hand, a C-corporation structure is subject to the recently lowered federal 21% rate on net earnings. But the C-corp is often more expensive to establish than an LLC or sole proprietorship.

In short, every business structure has tax benefits and drawbacks. As your business and income grow, the best type of structure may change, and switching entity types now can significantly impact how your small business is taxed for the 2022 financial year. 

You may wish to use the final weeks of 2022 to discuss business entity types with an outsourced professional CFO to determine which type best suits your needs, as well as to investigate other tax-saving strategies.

Talk to us about how Escalon’s FinOps can help you stay on top of your tax-deductible expenses and minimize your 2022 tax bill.

 

3. Claim bad debt deductions


While the idea of writing off unpaid accounts receivable as bad debt is unsettling, doing so can result in tax savings. The IRS allows you to deduct the cost of bad debt from your tax return, provided you can show that it’s a “valid bad debt” that forms part of your assessable income and entails reasonable collection attempts. 

For example, if your business loans money to a client or supplier for a business purpose but you are unable to collect repayment, you have bad debt. Visit the IRS website for more information on claiming bad debt deductions.

To make a long story short, aim to collect outstanding payments by Dec. 31. Keep a record of your debt collection efforts; receivables that seem like a lost cause can help save money on your 2022 taxes.

4. Leverage temporary 100% expensing


The Tax Cuts and Jobs Act expanded bonus depreciation to allow a 100% first-year bonus depreciation for qualified property acquired and placed in service before Jan. 1, 2023. Better said, you may be able to get a tax break for the entire cost of assets you purchased for your small business in 2022.

But to make the most of this bonus depreciation, you need to move now. This benefit will start to phase out after 2022, decreasing by 20% per year in taxable years beginning in 2023 and expiring Jan. 1, 2027.

In the event that 2022 represents a big income year for your business, consider moving some planned asset and property purchases into this year and claiming an immediate tax deduction. 

5. Don’t forget to tend your bookkeeping


Besides helping you stay organized and budget accurately, having a clean and complete year of bookkeeping can help reduce your tax bill. Just like tax preparation and payroll services, bookkeeping can also be considered an ordinary and necessary service for running your business and, therefore, eligible for a write-off.

If you’re planning to hire an outsourced bookkeeping service to stay up to date on your bookkeeping, arrange and pay for the service before Dec. 31 and claim the expense as a tax deduction in your 2022 return.

6. Optimize your business retirement plan


One of the best ways for small businesses to lower their tax liability is to set up and fully fund a retirement plan. This could be anything from a SEP-IRA to a Solo 401(k) or Cash Balance Pension Plan 401(k) combo

In fact, if done sensibly, maxing out retirement accounts can help high-income small businesses defer income taxes on hundreds of thousands of dollars every year. Without further ado, explore your available options and have in place your retirement plan before Dec. 31 to save on taxes.

7. Reschedule your repairs and improvements


If you own property for your small business, you may count routine repairs, renovations and additions as business expenses. Some of these business-property expenses can be deducted in their entirety in the year in which you spent the money, provided you meet the IRS guidelines or qualify under the Energy Policy Act.

Things are a bit different if you have a home office, as the IRS has strict rules as to what qualifies as a home office and which repair costs can be deducted. Don’t prepone improvement plans in hopes of a tax break without confirming eligibility or consulting a tax preparer first.

Takeaway


Year-end tax planning is a great way to reduce the size of your tax bill and increase your small business’s net profits. But you need to make these moves before Dec. 31, so better get cracking.

Want more? Escalon is the one-and-done solution for all Essential Business Services (EBS) including FinOps (accounting, bookkeeping and CFO services), PeopleOps (HR, benefits, recruiting and payroll) and Risk (business insurance). Talk to an expert today.

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