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6 Midyear Tax-Planning Tips for Business Owners

Waiting until year-end can mean missing out on tax savings.

If you wait until the end of the year to start saving on taxes, you might be too late. Proper tax planning is vital if you want to maximize the amount of business revenue you keep, and as a small business owner, by being proactive you can be in a better position to significantly lower your tax bill.

Below are several tax tips to help you avoid a huge tax bill at the end of the year.

Cut Your Tax Bill by 20% With a QBI Deduction

One of the best deductions established in the 2017 Tax Cuts and Jobs Act was the Qualified Business Income deduction. QBI is icing on the cake for business owners because you can get an automatic 20% deduction on your net income.

Sole proprietorships, partnerships, S corporations, and some trusts and estates may be eligible for the QBI deduction. In addition to deducting up to 20% of your qualified business income, this deduction may also apply to 20% of qualified real estate investment trust dividends and eligible publicly traded partnership income.

However, in 2021 the QBI deduction phases out for individuals making more than $164,900 and married couples making more than $329,800. If you expect to make more than this, don't count yourself out just yet.

You can get ahead of the game now by starting to contributing to your SEP-IRA, making pretax contributions to a health savings account, or increasing your charitable donations to lower your taxable income in order to qualify for the QBI deduction.

Do a Midyear Earnings Review

It's always good to review how business is doing, but it’s easy to keep putting that off in the rush of the day to day. Use a midyear review to look over your profit trends and expenses. Take note of any additional deductions you can claim and check all your costs. Cut any costs that you can go without or replace high-priced services or products with lower-priced ones if that makes the most sense for your business.

If you have a revenue goal, see how close you are to accomplishing that goal and work with your CPA to estimate your potential tax bill. Your CPA could be able to advise you on what next steps you could take to maximize your deductions.

With this kind of planning, you may find that it sometimes it pays to delay business income.

For example, last year, I had a client who was in her first year of business. At the end of the year, her income was just at the max to qualify for the QBI deduction. I advised her to start a contract she'd just won at the beginning of the new year so she could take advantage of the 20% QBI deduction. Not only did this save her thousands in taxes, but she got to take a break before starting a great project with a new client.

Make Sure You're Deducting Everything

So many business owners forget to claim many eligible tax deductions because they failed to plan before incurring the expenses.

With the pandemic lockdown, some business owners may have forgotten that they can take personal travel and use it as an opportunity to turn it into a business trip. That in turn can mean an opportunity for more deductions.

The IRS allows business owners to write off training, conferences, business lunches, and client meetings. As pandemic restrictions ease and travel is on your horizon, if you're going to visit a particular destination anyway, why not add business opportunities to the trip, too?

Many of my clients like to schedule a few business meetings at the beginning of their trips. Then they take a few days of rest and finish the week with a conference or training. They still got to enjoy the city they were visiting for a few days, met new potential clients, and learned something new. That's what I call a win-win.

Other often-overlooked tax deductions include car mileage, subscription fees, and equipment depreciation.

Under tax code 179, in 2021, if you buy (not lease) a 6,000 pound or heavier vehicle, you can deduct up to $25,000 in the first year you purchase the car if you use it for your business at least 50% of the time. The deduction may apply to SUVs, vans, and other vehicles purchased for your business.

I had one client who was facing a huge tax bill at year-end. Just before Dec. 31, he went car shopping. He purchased a Tesla Model X for his business and got to write off the entire 179 deduction even though he bought the car on the last day of the year.

Change Your Business Structure

Businesses may start off life as a limited liability company, but many shouldn't stay LLCs forever. After you make $50,000 in net income, it's time to upgrade your LLC into a S-Corp.

Under a sole proprietorship or and LLC, all of your income is hit with three types of taxes. First you get hit with federal tax, then you pay state tax (depending on your state), and finally you face a self-employment tax of 15.3%. All together, you could be paying 40%-50% in taxes on your income. This is where an S-Corp comes in handy.

The S-Corp structure allows you to avoid a large amount of self-employment taxes by paying yourself a portion of your net income in the form of a salary. For example, if you have net income of $100,000 and decide to pay yourself a salary of $40,000. You'll pay self-employment taxes on the $40,000, but the other $60,000 would avoid self-employment taxes, saving $9,180 ($60,000 x 0.153).

The negatives of having an S-Corp are the costs associated with operating it: payroll costs and more-expensive tax-preparation fees. But once you earn over $50,000 net income, the savings begin to outweigh the cost.

Do a Salary Review--for Yourself

In the beginning, as a small business owner, you may be so focused on reinvesting money into the business that you rarely think about paying yourself. A midyear review can help lower your taxes and show you whether it's time to give yourself a raise.

When you're the CEO of your S-Corp, you can plan your salary as mentioned above. But you want to make sure you don’t pay yourself too high of a salary. The higher your salary, the more self-employment taxes you’ll end up paying, so you want to be careful and tax-efficient here. The IRS has a minimum requirement for your salary based on income and industry, but a good rule of thumb is 40% of net income. Be sure to work with your CPA to find the right salary amount for you.

Plan Your Year-End Purchases

Don’t wait until the end of the year to make the big purchases your company needs. During your midyear review, make of list of items you could use to help your business grow. Then prioritize that list and start making the essential purchases based on what you can afford.

By the end of the year, buy the remainder of the list and write those expenses off to lower your tax bill. You'll be happy you started early.

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