5 End-of-Year Tax Prep Tips for Businesses in 2020
To say that 2020 was a unique year is an understatement, especially when it comes to businesses and their finances. Because of the unusual circumstances of this year — the July 15 filing extension, the CARES Act, payroll tax deferral, etc. — many businesses are wondering how their 2020 taxes might be impacted.
As you close out your business books for the year and begin planning for the upcoming tax season, here are some year-end tax prep tips to help you.
1. Plan your billing cycle carefully.
As a self-employed business owner, freelancer, or consultant, you can reduce your overall 2020 taxable income by billing clients in late December or early January for services rendered in the last month of the year. Payments you receive on January 1st or later won’t be taxed until 2021, so if you’re expecting a large influx from your December accounts receivables, deferring your billing and payment cycle can help reduce your immediate tax burden.
On the flip side, if you’re expecting business to pick up significantly in 2021, you may wish to accelerate the payment timeline for your December invoices so you can stay in a lower tax bracket and take care of your tax liability sooner.
2. Make as many tax-deductible purchases as possible before December 31.
If you’re planning to make any major business purchases like office equipment, hardware, or machinery, do it before the end of the year and, of course, hang on to your receipts. Many of these expenses can be deducted from your 2020 taxable income and reduce your overall tax bill. You may also wish to take advantage of charitable donation deductions if there’s a cause your business supports. Your CPA or financial advisor can help you determine the best strategic purchases and donations to make to maximize your tax savings.
3. Understand the impact of any COVID-related tax provisions that apply to your business.
Many businesses will have to take their pandemic-related tax situations into account when filing their 2020 return. For instance, if you took out a Paycheck Protection Program (PPP) loan, if your employees opted to defer payroll taxes through the end of 2020, or if you received unemployment compensation at any point this year, you will need to figure out how to account for those situations before you file.
Review your specific circumstances with an experienced financial professional to understand what you might owe, especially if you’re a PPP borrower who has until December 31 to use their funds.
4. Max out your retirement contributions for the year.
If you have an individual retirement account (IRA), now is the time to maximize your deductible contributions. For 2020, individuals under 50 can contribute a maximum of $6,000 to an IRA (or $7,000 if you’re 50 or older), so set up a one-time contribution to ensure you’re hitting that limit if you can afford to do so. While you can technically make 2020 contributions to your IRA until the April 15, 2021 filing deadline, getting the money into your account sooner means more time to take advantage of compound interest.
5. Prepare a list of questions to review with your CPA.
Every business owner knows that a trusted CPA can help them maximize their deductions and tax savings and make the most of their unique financial situation. Before you schedule your year-end review with your accounting professional, take the time to outline any questions or concerns you may have about your taxes this year so you can get your CPA’s advice and start taking action right away.
Looking for a new CPA firm? Schedule your free consultation with Miller & Company to find out if we’re the right fit for your business.