Tax-related topics are always complicated, so what can you do to deduct your taxes? This blog will go over last-minute year-end general business income tax deductions that you should implement before the end of 2020.
Prepay Expenses Using the IRS Safe Harbor
The IRS has regulations that contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses for up to 12 months in advance without adjustment, change, or challenge from the IRS. Under this harbor, your 2020 prepayments can’t go over into 2022. That’s because you can only prepay for 12 months of qualifying expenses. Qualifying expenses for a cash-basis taxpayer include:
- Lease payments on vehicles
- Rent payment on offices
- Rent payment on machinery
- Business and malpractice insurance premiums
Stop Billing Clients, Customers, and Patients
An easy strategy to reduce your taxable income for this year is to simply not bill your clients, customers, and patients until after December 31, 2020. Clients, customers, and patients don’t usually pay until they receive the bill. This is a time-tested tax-planning strategy that has been used by business owners for years! Using this strategy, you will be able to postpone paying taxes on the December 2020 income by moving it onto the income for 2021.
Buy Office Equipment
Bonus depreciation is currently at 100% and there is an increased limit for Section 179 expensing. So if you buy equipment or machinery and place it in service before December 31, then you’ll be able to get a deduction for 100% of the cost in 2020. Qualifying bonus depreciation and Section 179 purchases include:
- Machinery
- Equipment
- Computers
- Desks
- Furniture
- Chairs
Don’t Assume you are Taking too Many Deductions
One thing you should never do is assume that you’re taking too many deductions. You should claim all of your rightful deductions. Many business owners, especially new ones, don’t claim all of their deductions, which produces a tax loss. All deductions are valuable. Even the deductions not used this year can create tax benefits for you in the future. If your deductions exceed your income, you will have a loss for the year which can create an NOL (Net Operating Loss). However, because of these times with COVID-19, that net operating loss can give your business a cash infusion from the taxes you paid five years ago.
When it comes to your taxes, business deductions are important. The more you claim, the less you pay on regular taxes. We hope you consider these last-minute year-end general business income tax deductions. MFI Works, Inc is here to help, so please don’t hesitate to contact us! To schedule a free initial business strategy session, click here.
