Look for Opportunities to Reduce Your 2021 Tax Bill
Financial planning may be the last thing on your mind as we approach the end of 2021. But before the holiday season sets in and we begin a new year with new rules, don’t forget to take advantage of the opportunity to reduce your 2021 tax bill. In this episode of The Retiring Entrepreneur Podcast, I’m sharing my year-end tax planning tips for small business owners.
If you’re a business owner, you know how challenging cash flow planning can be. The last thing you want to do is overpay the IRS or not have enough free cash flow to pay your year-end tax bill. These tips can help you avoid costly mistakes and potentially reduce your 2021 tax bill.
Tip #1: Review Your Business Structure
The corporate structure of your business can have a significant impact on your overall tax bill. And as your business and income grow, the best structure for your business may change. Whether you’re a sole proprietor, LLC, partnership, S-Corp, or C-Corp, now may be a good time to review how your business is set up—especially if you haven’t done so in a while.
A CPA, CERTIFIED FINANCIAL PLANNER™, or business attorney can help you determine if your business structure is still optimal from a tax planning perspective. While you may not need to do this every year, be sure to make it a priority if you plan to sell your business soon, as your business structure can significantly affect your net payout.
Tip #2: Assess Your Year-to-Date Financials
You may not know exactly what you’ll owe this year, but your year-to-date financials can give you a clue. Comparing your first three quarters’ financials with last year’s numbers will give you an idea of how your tax situation is shaping up based on what you paid in 2020. If you find out that you need to set aside more cash in preparation for Tax Day, it’s better to know sooner than later.
Tip #3: Consider Accelerating Planned Expenses for 2022
If you have extra free cash flow this year, you may want to consider upgrading or purchasing new equipment or initiating other business expenses before the end of the year. In most cases, you can deduct these expenses from your top-line revenue to reduce your taxable income.
Just remember: to be deductible, a business expense must be both ordinary and necessary, according to the IRS. Be sure to work with your CPA or financial planner to make sure you treat your business expenses correctly on your tax return.
Tip #4: Open or Contribute to a Qualified Retirement Account
Contributing to a qualified retirement account is a good way to offset your tax bill and supplement your income in retirement. If your business doesn’t offer its own retirement plan, there are a variety of options available to self-employed taxpayers to help you save on a tax-advantaged basis outside of the traditional 401k and IRA programs. Alternative retirement plans like a SEP IRA, for example, may allow you to contribute up to 25% of your income.
And don’t forget about health savings accounts if you qualify. Though not technically a retirement account, HSAs offer triple tax savings if you use the funds for eligible health care expenses. In addition, HSAs have no withdrawal requirements, so you can continue to grow your savings through retirement if you don’t need to access your funds before then.
Tip #5: Contribute to Charity
Finally, the holiday season can be a great time to increase your business’s charitable contributions for the year. Not to mention, your charitable gifts can help offset your 2021 taxable income. Remember, you don’t necessarily have to donate cash. You may also be able to donate equipment and other assets and claim a deduction for the fair market value on your tax return. Just be sure to get proper documentation and receipts for your records.
These are just a few ideas to help you reduce your 2021 tax bill before the end of the year. Your CPA or financial planner may be able to identify additional opportunities to minimize your taxes.
Enjoy the Episode!
