Five tax-saving business strategies

Ideally, business owners don’t plan tax strategies last minute. But even if you didn’t plan ahead, it may not be too late to take advantage of certain deductions to reduce tax liability. From deferring invoicing to taking advantage of a home office, small business owners can make decisions both short and long term to reduce tax bills.

These five strategies offered by the U.S. Chamber of Commerce may help — just don’t forget to run it by your CPA:

1. Make the most of a home office.

Unfortunately, many small business owners give up a fair chunk by failing to claim a home office deduction. You don’t necessarily need to work in it full time, nor be a homeowner to claim it.

Home office deductions are commonly missed because of misconceptions about what defines them. Generally, the space must meet two requirements:

Regular and exclusive use. That means the space you consider your office can’t be used for any other purpose. Not the guest bedroom, however infrequently used. Not the family movie den.

Principal place of business: The home office must be your primary place of business. That means you don’t have another office elsewhere. Your home office must be used “exclusively and regularly for administrative or management activities,” such as billing, business calls, and bookkeeping.

There’s more than one way to take the deduction and certain other requirements — details at Irs.gov/businesses/small-businesses-self-employed/home-office-deduction.

Better yet, check with your accountant.

2. Defer some income.

From a tax standpoint, success can be a double-edged sword: The higher your income, the higher your taxes. But it may make sense to defer some income until the next calendar year in one of two ways:

Cash-basis accounting: Delay sending invoices or extend the due date until after Jan. 1. Income tax is based on when payment is received, not invoiced.

Accrual-basis accounting: If your business doesn’t charge until after full delivery of goods and services, delay until next year. Just be careful; strict guidelines govern recording deferred income under accrual accounting, so check with your CPA or controller to be sure your business can do this.

3. Equipment and depreciation.

One of the biggest business expenses can also serve as a tax reduction by writing off new purchases and offloading old equipment. If you need to buy a car (used for business), computer, or other equipment, do it before year-end.

You may also be able to take advantage of business credits for installing solar panels, energy-saving upgrades, or other sustainable investments.

Turning to depreciation of assets:

a. Declare the entire expense in 2020.

b. Use a shorter depreciation timeline.

c. Use an accelerated depreciation method.

Read more in IRS Publication 946, “How to Depreciate Property,” at IRS.gov.

4. Maximize retirement plan contributions.

Adding to a retirement plan is good for your current tax rate as much as your future. Contributions to a 401(k) are made with before-tax income, meaning taxable salary decreases as a result. (You can’t touch those funds without penalty until you’re 59 1/2, but saving is the point anyway).

Individuals may contribute up to $19,500 to a 401(k) in 2020. If your account is set up as an IRA, you may contribute up to $6,000 in 2020. For small businesses with 100 or fewer employees who set up a SIMPLE IRA, the limit is $13,500. These limits will stay the same for 2021 (they usually go up).

Small businesses can also deduct setup and administration costs of 401(k) plans for each of the first three years the plan exists. Plus, it’s a great benefit to offer employees.

5. Pay down debt and write off uncollectibles.

Financing growth with debt is a cost of doing business. Interest payments on those loans are often tax-deductible. A CPA may be able to help small business owners maximize such benefits and make loans more tax-efficient.

While not getting paid is never fun, it could be tax-deductible. Uncollectible or bad debts are those owed by a customer who hasn’t paid after collection was reasonably attempted. You may be able to strike such outstanding balances from total sales figures, thus lowering taxable income.

But if they do pay later, that would obviously become taxable income.

With these or any generalized tax tips, it’s important to check with a certified public accountant to analyze your specific situation. For more information on deductions and other tax topics see Irs.gov/businesses/small-businesses-self-employed.

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Sholeh Patrick, JD, is a columnist for the Hagadone News Network. Email: sholeh@cdapress.com