Don’t let the holiday season keep you from taking important steps to reduce your small business taxes in 2021. You still have time to put some plans into action.
Are you planning to purchase new or used equipment, machinery, or office equipment in the coming year? If you buy them and put them in service by December 31, you can deduct 100% of the cost as bonus depreciation.
Certain building improvements are also eligible for bonus depreciation. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property: land improvements other than buildings (such as fencing and parking lots) and “qualified improvement property,” a broad category of internal improvements made to nonresidential buildings after they are placed in service. Inadvertently, the TCJA eliminated bonus depreciation for qualified improvement property. The 2020 CARES Act, on the other hand, made a retroactive technical correction to the TCJA. The change allows qualified improvement property placed in service after December 31, 2017, to be eligible for bonus depreciation.
Keep in mind that Section 179 expensing has become less important as a result of 100 percent bonus depreciation. If you own a small business, you’ve most likely benefited from Section 179. It’s an optional benefit that allows for an immediate deduction of the cost of equipment, machinery, “off-the-shelf” computer software, and some building improvements, subject to dollar limits. The TCJA expanded Sec. 179 expensing, but the availability of 100 percent bonus depreciation is economically equivalent, reducing the cases in which Sec. 179 expensing is useful.
Please contact us for more information on the bonus depreciation break and which assets qualify to help reduce your small business taxes.
Write off heavy vehicles
The 100 percent bonus depreciation deal can result in significant tax savings on first-year depreciation deductions for new or used heavy vehicles used more than 50% for business. This is due to the fact that heavy SUVs, pickup trucks, and vans are classified as transportation equipment for federal income tax purposes. As a result, they are eligible for 100 percent bonus depreciation.
When the SUV, pickup, or van has a manufacturer’s gross vehicle weight rating of more than 6,000 pounds, 100 percent bonus depreciation is available. The manufacturer’s label, which is usually found on the inside edge of the driver’s side door, can be used to verify a vehicle’s weight. If you’re thinking about purchasing an eligible vehicle, putting it in service before the end of the year could be a significant way to reduce your small business taxes.
Time income and deductions
If your company operates on a cash basis, you can significantly reduce your taxable income by deferring deductions until 2021 and deferring income until 2022. (assuming you expect to be taxed at the same or a lower rate next year).
For example, you could charge recurring expenses that are normally paid early in the year to your credit card before January 1 and claim the deduction for 2021 even if you don’t pay the credit card bill until 2022. In some cases, you may also be able to prepay some expenses, such as rent or insurance, and claim them in 2021.
In terms of revenue, wait until near the end of the year to send out invoices to customers with consistent payment histories. Businesses that operate on an accrual basis can take a similar approach, deferring the delivery of goods and services until next year.
Account for All Possibilities to Reduce your Small Business Taxes
Keep in mind that some of these strategies may have a negative impact on other aspects of your tax liability, such as the qualified business income deduction. Make the most of your tax planning opportunities by contacting us.