Your business exists to serve a human need. The better you meet that need the more you grow, the more people you can serve and employ, and the more lives you can change. That is the beauty of capitalism. Don’t let minimizing taxes distract you from maximizing value.
I tell business leaders that paying more in taxes is the greatest indicator of your success. We can only do so much to minimize taxes. Eventually, we must pay Uncle Sam his portion. But we never want to pay more in taxes than required by law.
First, never make a business decision only to reduce your taxes. Buying an asset that doesn’t give you a great return on investment to get a tax deduction is a bad decision.
Why? Buying assets as perks that don’t provide a great return on investment will distract you and your team from your primary goals. Those goals should be maximizing value for shareholders, customers and employees.
Owners and team members should be paid a market rate salary for what you do and earn on what you own. This is a key distinction that I learned from Greg Crabtree at www.simplenumbers.me. If you stay focused on the bottom line, your team will too.
Now let’s talk about tax-saving ideas. If any of these sound good to you, discuss them with your tax advisor. The rules are tricky.
1. Asset Purchases: This is one of the first things that comes to mind when we think about year-end tax planning. Again, do not buy assets that you do not need. Assets depreciate and you pay taxes to own them. Only buy assets that will provide a great return on investment for your business.
If you have asset purchases that meet the above criteria, year-end is a great time to make them. The new tax law has given us 100% bonus depreciation and expanded Section 179 rules that allow us to deduct many major purchases that were previously unallowed.
2. Cost Segregation: Cost segregation is the practice of analyzing real estate assets that you acquired or built to maximize depreciation expenses as quickly as possible. The new tax law makes this strategy even more valuable by bumping up bonus depreciation from 50% to 100% and expanding the assets that qualify.
3. Change in Accounting Method: The new tax law allows businesses with up to $25 million in gross receipts to take advantage of accounting methods that were only available to much smaller businesses. Your business may now be eligible to report on the cash basis. This is another great opportunity to maximize current year deductions and defer taxes.
4. Timing of Income and Expenses: If you are eligible to use the cash method of accounting for tax purposes, you should consider the timing of your income and expenses as you approach year-end.
If you expect to be in the same or lower tax brackets in 2021, you can minimize your 2020 taxable income by sending out invoices a little later. You can also pre-pay some expenses for 2020. There are limitations to this strategy, so check with your tax advisor.
5. Maximize Qualified Business Income Deduction: The 20% QBI deduction was a major element of tax reform. For tax years 2018-25, the deduction can be up to 20% of a pass-through entity owner’s QBI.
There are various limitations on the QBI deductions that can increase or decrease your allowable QBI deduction. Talk to your tax pro to make sure you are optimizing your deduction for this year.
6. Retirement Plans: Establishing and maximizing contributions to retirement savings plans are always a great way to defer taxes. Make sure you are maximizing this deduction.
Side Note: I love saving taxes today, but is deferring taxes on my retirement savings the best long-term move? The argument for saving for retirement after-tax via Roth accounts is gaining steam in my mind. If you believe you will be in lower tax brackets when you draw from your retirement funds, then deferring taxes by saving pre-tax seems like the right thing to do.
I’m not sure that will be the case for me and many others. I don’t see taxes getting lower with our national debt the way it is. Saving after-tax also keeps your AGI (adjusted gross income) lower in retirement. AGI drives the taxability of Social Security and how much you pay for Medicare. Be thinking about whether you should save for retirement using pre-tax or after-tax accounts.
7. PPP Loans: Not a tax-saving move, but something to be considering. PPP loans were supposed to be tax-free. As of right now, the IRS will not consider loan forgiveness taxable income, but will not allow deductions for the expenses used toward loan forgiveness. Most businesses have not counted the PPP loans as revenue. Therefore, their taxable income might be a lot higher than their books are showing (by the amount of PPP loans forgiven).
Plenty of people are fighting the taxability of these loans but we need to be prepared to pay the taxes.
8. CARES Act Changes: There have been a lot of changes to tax law due to the COVID pandemic. Here are a few to be thinking about.
– Increased limitation on Business Interest Expense from 30 to 50% of Adjusted Taxable Income for taxable years beginning in 2019 and 2020 for C and S-Corporations. The 50% limitation is only applicable to tax years beginning in 2020 for partnerships.
– R&D Tax Credit. Did the pandemic force you to develop custom technologies or processes? Your expenditures may be eligible for an R&D tax credit.
– Net Operating Loss Carrybacks and Limitations. The CARES Act lifted carryback restrictions and allows a five-year carryback of NOLs arising in 2018, 2019 and 2020. It also eliminated the 80% limitation until years beginning after 2020.
– Qualified Improvement Property. QIP is non-residential interior improvements excluding elevators, escalators and structure changes. It was supposed to be 15-year property and eligible for bonus depreciation but was accidentally assigned a 39-year life. The CARES act fixed this effective Jan. 1, 2018. You can now go back and claim bonus depreciation for any QIP starting Jan. 1, 2018.
We couldn’t cover everything in this article, but I hope this gives you some great ideas to discuss with your tax advisor.
As always, you can reach me at (229) 244-1559 if I can help in any way.
Curt Fowler is president of Fowler & Company and director at Fowler, Holley, Rambo & Stalvey. He is dedicated to helping leaders build great organizations and better lives for themselves and the people they lead.
Curt is a syndicated business writer, keynote speaker, and business advisor. He has an MBA in strategy and entrepreneurship from the Kellogg School, is a CPA and a pretty good guy as defined by his wife and four children.