Tax season starts back up in a couple months. If you own or manage a business, you understandably dread this time of the year. However, tax season will prove less stressful if you follow the tax-saving tips detaiOwnled below. When in doubt, reach out to your financial advisor and/or tax professional for assistance with preparing and filing your taxes.
Establish the Optimal Business Structure
The structure of your business determines the manner in which it is taxed. As an example, a LLC with several owners is taxed as though it is a partnership. A LLC with a sole owner is taxed as though it is a sole proprietorship. The filing of IRS Form 2553 sets the stage for LLCs to be taxed as either a S or C corporation. However, business owners who have a LLC can choose to be taxed as though they are a S corporation. This takes place in a retroactive manner at the end of the year. Keep in mind there are certain conditions that apply so be sure to consult with your financial advisor and/or tax professional.
Take the Deduction for New Equipment Purchased
If your business bought new equipment in the prior year, you can take a deduction as detailed in Section 179 of the tax code. In fact, you can deduct the entire amount of the purchase of equipment that qualifies as well as financed/purchased software from your gross income. The deduction extends all the way to $1,040,000 on equipment that is used or new and even software that is off-the-shelf. As long as the equipment in question was bought or financed prior to the end of the year you are paying taxes for, the deduction can be taken for tax year 2020.
Take Advantage of Deducting Vehicle Expenses
Did you use your automobile to meet with clients or attend business meetings outside of your office in the prior calendar year? If so, you are empowered to deduct those expenses through the year’s standard mileage reimbursement of 57.5 cents per mile or by calculating actual expenses. As an example, if you drove 10,000 miles during the prior year and 2,500 of those miles were for business, 25% of related expenses ranging from depreciation to registration/license fees, insurance, tires, gas and repairs can be claimed.
Accelerate Deductions and Defer Income
It is possible to defer income to the subsequent tax year while decreasing adjusted gross income for the prior year. Your tax professional or financial advisor will help you pinpoint the optimal tax deduction strategy for your business. As an example, you can transmit invoices later in the final month of the year to obtain payment starting in January as opposed to the final days of the year, ultimately shifting your tax burden to the next year. Alternatively, if you would like to take a deduction for the current tax year, it is worth considering prepaying bills prior to the start of January.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.