Year End Tax Planning for Entrepreneurs

Year End Tax Planning for Entrepreneurs

With the end of the year fast approaching, now is the time for entrepreneurs to start tax planning. Making the right moves before the calendar closes could save you lots of money, time, and frustration when your taxes come due. Below are some year end tax planning tips to consider while there’s still time:

1. Check for Covid Tax Credits – You may be eligible for tax breaks related to the ongoing Covid-19 pandemic. For instance, the Families First Coronavirus Response Act (FFCRA) gives businesses tax credits for extending the amount of medical leave they offer.
2. Explore Employee Retention Credits (ERC) – The American Rescue Plan Act modified and expanded the employee retention credit to include a new category of businesses – recovery startup business. Small businesses that began operations after February 2020 may be eligible for a payroll tax credit up to $7,000 per employee for the third and fourth quarter of 2021. Previous categories of ERC remain in place for businesses that experienced a significant decline in revenue.
3. Pursue R&D Tax Credits – The IRS allows startups to expense R&D costs, but that will end this year. Take advantage of that opportunity while it lasts. Alternatively, you may be able to get a dollar-for-dollar offset of the tax liability for various R&D activities – something many startups are eligible for yet not enough take advantage of. A study is required, and there may be timing considerations, for the tax liability offset so it is worthwhile exploring your options early.
4. Calculate State Sales Tax Responsibilities – Due to recent changes, many businesses have to collect state sales tax everywhere, not just in their home state. Liability may depend on the sales volume in each state or where you have physical presences, not just a headquarters, so now is the time to begin determining your potential exposure and calculating the corresponding tax bill.
5. Rethink Payroll & Income Taxes – If you have employees working remotely in other states, you may have to register in each state and have income taxes exposure in those locations. Look into this issue before the end of the year so that you’re not scrambling later or letting tax bills go unpaid.
   
6. Review Your Capitalization Policy – The book-tax conformity election (also known as The de minimis safe harbor) allows you to deduct expenses related to property acquisitions rather than capitalize them. You may want to accelerate certain expenses to take advantage of this election, but deferring revenue until later might also be worthwhile.
   
7. Maximize Your QBI Deduction – If you own a pass-through company, you can take a 20% deduction on qualified business income (QBI). How much you can deduct depends on some complicated calculations, and you may be able to take actions now to maximize your benefit. That’s why it’s beneficial to act before the end of December. 

Important as year-end tax planning may be, entrepreneurs have enough on their plate already. Finding the time to work through each of the tips above may not be realistic. Plus, most entrepreneurs aren’t tax experts who obsess over the ever-changing details of tax policy, making it difficult to jump on every advantage available (without getting into tax trouble along the way).

Therefore, the best tip for year end tax planning is to enlist the help of a trusted tax planner. An expert can make the most of the time you have left to minimize next year’s tax bill and beyond. Get the right tax experts in your corner immediately – contact Prosser.