How to Give Yourself a Tax Cut
Don't wait for politicians to give you a tax break. Here are some ways to give yourself one.
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It's been one of the most tumultuous, uncertain years in modern history, and yet – at least in my line of work – we now have some form of certainty just in time for tax season.
With Democrats owning a voting majority in Congress for the next two years at a minimum, small- and medium-sized business owners can look to Joe Biden's proposed tax plans from the campaign trail for what to expect.
I, as well as many others, anticipate higher taxes.
Related: How Will the Biden Tax Plan Affect Your Small Business
It's not a done deal, however. The majorities are slim. And with more coronavirus aid expected to pass a Democratic legislature, some of the loftiest tax code changes may not pass. After all, it's a fiscal fact that funding relief has to come from somewhere.
That said, business owners can — and should — prepare for significant changes to tax rates in the very near future. I went into this business because I want to see business owners keep as much of their hard-earned money as possible, regardless of what's happening in Washington or elsewhere.
My recommendation? Don't wait for politicians to give you a tax break. Find ways to give yourself one.
Here's what I'm telling small and midsized business owners to start thinking about as we head into 2021:
Consider your corporate structure
Particularly for the smallest businesses, consider how you've incorporated your business.
If you're a single-member LLC, your business and personal finances are going to mingle come tax time. This not only increases your chances of an audit but makes it more difficult to parse out what can legally be deducted as a business expense.
If you haven't already, investigate becoming an S-corp. This opens up your options for deductions, ensures a cleaner tax record, and is likely to save you thousands, if not tens of thousands, of dollars in the long run.
You should undergo a review with your financial and legal advisors now, at the beginning of the year, to see how you might benefit from a change in how your entity is designated.
Related: Regulations and Taxes: What's in Store for 2021
Be ready for audits
Some, including myself, believe the Biden administration will raise tax revenue by clamping down on existing rules. This could come in the form of an increase in internal auditors at the IRS.
While I always preach maintaining clean books and being prepared for an audit, this potential rise in auditors clearly increases the chances of receiving one of those envelopes with the dreaded "Internal Revenue Service" return address in the corner.
That means taking some small measures, like ensuring you always retain the original receipts for deductible purchases (not just the credit card receipt). And some bigger ones, like being honest with your advisors and taking care of anything from the past that might surface.
Credits are your best friend
Finding ways to get more deductions is one thing, and your accountant will be happy to help, but tax credits are the holy grail. That's because tax credits result in a dollar-for-dollar reduction of your overall tax bill instead of a percentage knocked off. In the end, it means more money in your pocket at the end of the day.
One such credit to explore with your tax advisor is the Research and Development tax credit.
Related: 8 Tips to Squeeze More Savings from Your Home Office
Take advantage of pre-tax options
Whether it's tucking money away in a 401(k) until the political winds blow back toward lower tax rates or taking advantage of HSAs and FSAs, there are many ways small- and medium-sized businesses can ease tax burdens by utilizing pre-tax funds.
Medical bills could be a big one. They add up quickly. If you know medical expenses are coming, ensuring your FSA program is up to snuff helps ensure you're not using post-tax money to pay for them.
There are plenty of other legal avenues to ensure more pre-tax dollars will allow you to retain and expand your business resources, but they can get more complicated. That's another question for your advisor.
It's all about planning
Giving yourself a tax cut is perfectly doable and entirely legal. Just take every measure possible to research the complexities and nuances.
The future is never certain — 2020 proved that — but planning your businesses' tax strategy makes it less uncertain. And as 2021 comes into focus, the time to start planning is now.