As we approach the end of the calendar year for 2021, it’s never too soon to begin planning ahead for next year’s tax season. However, in light of recent developments with changing tax laws, government aid, and increased assistance due to the COVID-19 pandemic, there is a lot to consider when creating a sound tax planning strategy for 2021.
Part of adopting a wise plan around your tax liabilities involves how you structure and strategically think about your business. By setting aside some time to examine where you are at financially, you can potentially save your business valuable resources in reduced tax liabilities.
In this post, we will highlight ways that make it easy for you to make the most of your current financial situation and minimize your tax liabilities.
Depending on your business needs, there are a variety of ways that you can set up your company as a corporate entity. Most businesses can be structured as either a sole proprietorship, partnership, or corporation. With corporations, there are three tiers that include an S-corp, C-corp, and a hybridized version that is currently very popular, an LLC. LLCs are very common because it allows you the flexibility to elect to be taxed as a corporation and fall under an S-corp or C-corp entity.
This is important to understand because currently, the tax rate for C-corps is 21% which is a flat rate, and a vast decrease from the former requirements. If you are incorporated as a C-corp in 2021, your business will have a significant advantage if the rate remains at 21%, considering that S-corps and Partnerships are taxed at the individual rate which can be as high as 37%.
Before making any changes, make sure to speak with your tax professional to understand and evaluate whether it makes sense to convert your business. Look at the entity structure to make sure you are maximizing the tax benefits available to you with the tax rates that suit your business best. For instance, certain businesses that are structured as S-Corps are eligible for receiving the Qualified Business Income Deduction, which is an automatic 20% deduction.
Since businesses face a spectrum of different needs in the wake of the global pandemic, tax planning is more important than ever. Some have thrived under COVID–with record profits and are now facing a huge tax bill if they don’t commit to doing some tax planning, and timing qualified expenses that will help add more deductions before the end of the year.
Other businesses, such as those in the hospitality industry, are still recovering, and need to know what options are available to help them plan for their future. These businesses can benefit from tax planning to make sure they aren’t overpaying on their estimated taxes, to help offset their financial burdens after suffering losses. Wherever your business falls on this spectrum, planning ahead with your dedicated tax professional will help you to save as much money as possible.
One of the easiest, but most effective ways to plan ahead is to look at your business needs such as vehicles, equipment, tangible property, etc. to determine if you need to invest in any such fixed assets. Planning for year-end purchases of these large items can help you take advantage of as many itemized deductions as possible.
Conducting an end-of-the-year review is something that business owners need to prioritize months ahead of the New Year. Our suggestion is to look at your earnings through the end of September and use that number as a gauge to make sure you are paying enough in estimated taxes.
If profits are higher than anticipated, you may want to pay extra taxes to get ahead of your tax liability. On the other hand, if you didn’t earn as much as you’d hoped, you can use an end-of-year review to plan to retain capital and avoid paying out as much in taxes.
Part of a healthy tax planning protocol is also making sure that you are thinking ahead for after your employees have ended their careers. Retirement plans help with employee retention as you scale and grow your business. By incorporating a retirement plan into your company’s structure, it will attract top-tier talent, and help you to sharpen your competitive edge within your industry. Retirement plans also help to lower the business’ overall tax burden, which can reduce your business’s liabilities.
Another strategy for businesses is to accelerate expenses and defer income.
Every year, the IRS has new guidelines which you need to be aware of and maximize to the extent you can. For example, forecast your estimated expenses and cash flow at year-end. If you are using the cash basis of accounting and your business is cash solvent, you can ask vendors to pay you in January instead of at the end of the year.
In addition, a healthy cash flow at year-end could allow you to prepay some expenses.
This is a great strategy for minimizing your tax liability, by accelerating expenses and deferring your income. Just keep in mind, that if new legislation passes to increase the tax rate for the next calendar year, you could end up paying more by deferring your income into the next year.
Tentho has a team of dedicated tax professionals, who can help you to make the most of your financial future, by getting an accurate snapshot of where you stand and how much you owe. Their financial experts are ready to answer any tax-based questions you may have and are happy to pass along their expert industry-leading knowledge to you. Schedule your free consultation today to connect with our experts and let us help you enhance your tax preparation strategies and minimize your tax liabilities in 2022.