ENd of Year Tax Planning - Business

Here are six powerful business tax deduction strategies that you can easily understand and implement before the end of 2021. 

1. Prepay Expenses Using the IRS Safe Harbor

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS. Under this safe harbor, your 2021 prepayments cannot go into 2023. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule. For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and health/business/malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 31, 2021, you mail a rent check for $36,000 to cover all of your 2022 rent. Your landlord does not receive the payment in the mail until Tuesday, January 4, 2022. Here are the results:

• You deduct $36,000 in 2021 (the year you paid the money).

• The landlord reports taxable income of $36,000 in 2022 (the year he received the money).

This is particularly important for doctors selling in 2021, and is essential if you are providing post-closing services as a W-2 employee. This will be your last chance to take advantage of owner related tax deductions.

2. Stop Billing Customers, Clients, and Patients

If you are on pace for a record-setting year, blunt your tax impact by discontinuing billing prior to the end of the year. Patients and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Doctor usually bills his patients and the insurance companies at the end of each week. This year, however, she sends no bills after the first week in December. Instead, she gathers up those bills and mails them the first week of January. She just postponed paying taxes on his December 2021 income by moving that income to 2022, and a more comprehensive income tax estimate can be completed.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2021.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

This is a particularly valuable strategy if you plan on using cash, or are on the cusp of the Qualified Business Income Deduction. It is also very handy for replacing technology items for staff members around the time of the Holidays.

Beware using this strategy if you plan on financing the equipment! This can create phantom income in future years and is advisable only in very specific situations.

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31. If needed, reach out to us directly for help on reimbursing for expenses.

5. Deal with Your Qualified Improvement Property (QIP)

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made when enacting the TCJA.

QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

The big deal with QIP is that it’s not considered real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2021, you need to place the QIP in service on or before December 31, 2021.

Planning note. If you have QIP property on an already filed 2018 or 2019 return, it’s on that return as 39-year property. You need to fix that—and likely add some cash to your bank account because of the fix.

6. Purchase an Automobile

There is a dedicated article in the resource center on this topic.