Tax Planning Strategies for Businesses

As 2021 draws to a close, there is still time to reduce your 2021 tax bill and plan ahead for 2022. This article highlights several potential tax-saving opportunities for owners of businesses operating as an S corporation, partnership, or sole-proprietorship.

Accelerating Income into 2021

You may benefit from accelerating income into 2021. For example, you may anticipate being in a higher tax bracket in 2022, or perhaps you need additional income in 2021 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2021 will be disadvantageous if you expect to be in the same or lower tax bracket for 2022. If you report income and expenses on a cash basis, issue bills and attempt collection before the end of 2021. Also, see if some of your clients or customers are willing to pay for January 2022 goods or services in advance. Any income received using these steps will shift income from 2021 to 2022.

Common Business Deductions

Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 7.5%-of-AGI floor.

100% bonus depreciation is allowed for all assets purchased with a depreciable life that is less than 15 years. This allow you to deduct the full cost of the equipment in the year it is purchased. This also applies to improvements to a building as long as it is an interior improvement, not an enlargement and done after the building is placed in service.

Section 179 is also available, the limit for 2021 is $1,050,000 (with a phase out for purchases in excess of $2,620,000.

Bad Debts: You can accelerate deductions into 2021 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2021 year-end financial statements.

Popular Business Credits

Alternative motor vehicle, electric vehicle and alternative fuel credits

The IRS offers several tax credits related to alternative energy use. If you produce or use alternative fuels in business, use an electric vehicle or use a vehicle that runs on alternative fuel, then you might be able to claim one of these small-business tax credits:

  • Biodiesel and Renewable Diesel Fuels Credit
  • Alternative Fuel Vehicle Refueling property credit
  • Biofuel Producer Credit
  • Qualified Electric Vehicle Credit
  • Investment Credit for rehabilitation and alternative energy

The amount of these tax credits varies based on which credit you claim, For example, the qualified electric vehicle credit is worth between $2,500 to$7,500 based on the vehicle’s battery capacity.

Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips

Individuals who work in the food and beverage industries rely heavily on tips. If employees in your food or beverage establishment receive tips, you can claim a tax credit for the social security and Medicare payroll taxes that you’ve paid on those tips.

In most cases, this small-business tax credit equals that amount of employer social security and Medicare taxes that you paid for tips received by the employee. However, the amount of the credit is reduced for businesses that don’t pay their employees at least the federal minimum wage that was in effect on January 1, 2007 ($5.15 per hour). The federal minimum wage is higher today, but for purposes of calculating this credit, you must reference the 2007 minimum wage.

Tax Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment

This tax credit helps to lower the cost of setting up a retirement plan for your team. Businesses are eligible for the tax credit if:

  • They had 100 or fewer employees during the tax year, all of whom received at least $5,000 in wages. They have not previously had a retirement plan in place over the last three years for the same group of employees.
  • Most common retirement plans, including 401(k) plans, SEP IRA plans and SIMPLE IRA plans, qualify under this tax credit. The credit is worth $500, to be claimed for administrative costs and money spend to inform employees about their benefits and options under the plan.
  • People who contribute to a retirement plan, including self-employed individuals, can take advantage of a retirement savings contribution tax credit if they fall into a lower income bracket.

There is still time to implement these strategies to minimize your 2021 tax liability and plan for 2022. Contact us today if you have any questions about tax-saving opportunities.


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