Thanksgiving is gone and Christmas is fast approaching! Can you believe that another year, especially this year, is nearly over?! As we approach the end of 2020, it is a great time to review your strategies to manage your tax liability and make some year-end adjustments. With the pandemic, this year presents even more challenges in the tax planning process such as the questions related to how the Paycheck Protection Program (PPP) money is to be handled for taxes. This question, along with many others, makes planning even more important this year.
Here are 5 tips to get the most out of your tax planning.
- Determine where your Company stands right now. If you don’t keep your financial records current, this is an excellent time to get organized and all information into your accounting software. This will allow you to see how your Company has performed so far this year. Without accurate year-to-date records, it is hard to estimate the rest of the current year, which helps project your taxable income for 2020.
- Manage your year-end income. Depending on whether your business is on the cash or accrual basis, you can manage the timing of your income. By timing when you send out your invoices, you can manage your income and your cash receipts. Also, keep in mind that “managing your income” may mean accelerating income, not just deferring income. If due to COVID-19 your business income has decreased and therefore, you want to include more income in 2020 to take advantage of a lower tax rate, this may be your tax strategy.
- Time the purchase of large assets. Do you need a new piece of equipment for your business, possibly new computers or software? If you place it in service by December 31st, you can get a full write off of the purchase price in 2020 rather than depreciating it over the life of the asset. The maximum amount that can be expensed is $1,040,000. The rules for depreciation of vehicles are more complicated so be sure to discuss with your tax advisor to make sure you meet the IRS requirements and your business needs.
- Set up a retirement plan. Starting a small business retirement plan may be easier than you think and can offer significant tax savings to the business and your employees. Employer contributions are deductible expenses to the business, the employee is allowed to defer income that is not taxed until distributed, and the growth of the investment is tax deferred. Another advantage is that the employer’s retirement contribution can be made up to the due date of the business tax return.
- Determine Business Losses and Carryback. The CARES Act resurrected a provision allowing businesses to use current losses against past income for immediate refunds. Net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period with an unlimited carryforward period and are not limited to 80 percent of taxable income. This means that you can carry back your loss and get a refund to help your business. If you had a loss in 2018 or 2019, and haven’t carried it back, now would be a great time to do so. If you have a loss for 2020, the sooner you file your return, the sooner you will get your refund.
This year has been a very unusual year for all of us but working through the process of tax planning should give you more options and allow you to follow your tax strategies. Now is a great time to contact your tax accountant and get their guidance to lead you through these turbulent times to hopefully give you peace and joy through the holiday season.
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen Hurst Clark Smith (MHCS) celebrates 70 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and financial planning expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHCS is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHCS feels is vital in today’s business environment.