The 2022 tax season may be months away, but New Year’s Eve is here before you know it. The fourth quarter is the time for aggressive tax planning to reduce the 2021 tax. For employers, tax planning should not be an annual exercise when filing a tax. The extension may delay the 2021 tax filing until the second half of 2022. However, many tax planning moves that will help reduce the total unpaid tax amount must be done by the end of this year.
See how your business is set up
What is the corporate structure of your business? Are you a sole proprietor, S-Corp, LLC, partnership, or C-Corp? As your business and income grow, the best structure for your business may change. This is something you need to check with your CPA and certified financial planner every few years (if your business is growing fast or if there is a change in ownership, you need to check more often. ).
Check your business retirement plan
One of the best ways for small business owners to reduce taxes is to establish a retirement plan. This can be anything from a SEPIRA to a Solo 401 (k), or a combination of a 401 (k) and a defined benefit pension plan. Should I write a large check on the IRS or your own retirement account? The choice is clear to me. For reference, high-income SMEs may defer hundreds of thousands of dollars in income tax annually.
Here are some of the most common retirement plans for high-income small business owners.
SEP IRA- If you are self-employed, you can donate 20% of your self-employed revenue to an annual SEP IRA with a maximum donation of $ 58,000 in 2021. There are no SEPIRA catch-up donations. Since there is no year-end deadline, you can set SEPIRA just before filing the tax for the previous year.
Solo 401 (k)- Solo 401 (k) typically allows for maximum pre-tax contributions. This means less unpaid taxes. Corporate employees can make catch-up donations of up to $ 19,500 in 2021 and $ 6,500 for those over the age of 50. In addition, businesses can make a profit sharing contribution of up to 25% of salary. This means that if an individual donates the maximum amount allowed by the IRS ($ 19,500 in 2021) and the company donates the maximum salary allowance, a total savings of $ 58,000 ($ 64,500 for those over 50). I can do it.
You can also benefit from a $ 6,500 catch-up donation for business owners over the age of 50, in addition to the Roth Solo 401 (k), $ 19,500 for the employee portion of your donation. She can be included in the plan, basically doubling the amount you can donate and the amount of tax savings.
Defined benefit pension plan – Defined benefit pension plans are of paramount importance to those who require significant tax savings. Combined with a 401 (k) profit sharing plan, your business can rob hundreds of thousands of dollars a year. This is sometimes called a cash balance plan.
The defined benefit pension plan is the most complex of the SME retirement plans to set up due to the complexity and time-consuming design of the plan. If you think this may help your business keep more of the hard-earned money, talk to your trusted trustee financial planner as soon as possible. The extra work is worth more to the owners of high-income small businesses who are willing and capable to make the most of their contributions to the 401 (k) and defined benefit schemes. Contribution limits vary by age and income, but can often exceed $ 150,000 per employer annually. Tax savings can be enormous, especially for people in high-tax states like California and New York.
Are you eligible for a home office deduction?
During the COVID pandemic, more and more small business owners began working full-time at home. Business owners reading this who work from home may be eligible for a home office deduction. Here’s what you need to know to determine if you’re eligible and to better understand how this often horrifying home office deduction works:
This valuable tax cut can save you hundreds or even thousands of dollars each year. The best part is that you are already paying these costs for your home, no matter what your business uses. Take the time to discuss your home office deductions with your tax preparer to make sure you are qualified.
Don’t ignore your bookkeeping
Filing tax is a stressful process even for the most organized business owners. Do not try to file taxes from a shoe box full of receipts. Split your accounting and bookkeeping throughout the year. This can easily be done using software such as QuickBooks. For more complex businesses with many invoices and costs, consider hiring a bookkeeper. At a minimum, avoid procrastinating until the taxable time to organize your books. Missed tax credits increase your taxable income and are essentially a waste of money.
Request bonus depreciation for the first year
One of the positive changes from the Tax Cuts and Jobs Act (TCJA) is the ability to obtain 100% first year bonus depreciation on eligible used and new assets acquired and used during the 2021 fiscal year. is. More specifically, you may be eligible for a tax deduction on all costs of assets purchased in 2021. For high-income years, we recommend that you consider raising your planned purchases to 2021.
Proactive tax plan for possible tax changes in 2022
When planning for 2021 and 2022, the Biden administration proposed a tax increase of $ 400,000 or more per year for single filers and $ 450,000 or more for joint filers if married. I have. Many business owners find that they have income above these levels. You should not make major tax planning decisions based on government proposals, but you should be prepared for potential changes in income taxation. The higher the tax rate, the more valuable the tax plan will be for you and your business.
Many of the current changes from TCJA (Trump Tax) are expected to continue until 2025, even without the Biden administration’s changes in tax law. The TCJA was supposed to be a big win for all taxpayers, but many complained that it only benefited the ultra-rich and centered around many of the mid-career. Now Trump is talking about a new tax cut for the middle class. It is everyone’s guess how it will be paid.
Actively work on tax planning
At the right time (from aggressive tax planning), your income and deductions can be even more valuable. If you use a pass-through entity (owner, S Corp, LLC, or partnership), some of your business profits and deductions will be passed on to you and ultimately taxed on your own personal tax return. Taxes are based on the income and filing status of the entire household.
Currently, the 2021 federal income tax bracket is similar to the 2020 bracket, with some adjustments to inflation. If you expect similar or lower tax rates next year, we recommend that you postpone some …