Vlad Rusz is a CPA at Centaur Digital Corp, helping busy business owners efficiently manage their accounting systems.
As the end of the year draws near, there are many holiday events to look forward to. But unless you’re an accountant, tax planning rarely factors into the year-end celebrations. If you work on your tax planning throughout the year, then year-end tax planning is just a swift verification that you didn’t miss any deductions. However, if you’ve neglected your taxes until December, use these tips to quickly cross a few tax planning items off your list and find some extra cash for your never-ending holiday shopping list!
1. Project taxes are due.
The first step in any tax planning is to determine how much you owe. Toward the end of the year, you should already have a decent idea of what your net income is if your bookkeeping is up to date. This is why bookkeeping is such an important function in tax planning. Without it, you don’t know your taxable income, let alone how much you might owe. Once you know your estimated net income, your tax preparer or an online calculator can quickly help you determine your tax liability.
2. Determine retirement contribution.
If you haven’t made any retirement plan contributions during the year, determine how much cash you have available to contribute. While it’s nice to dream about making the maximum contribution, not everyone has the funds for it. So start with what you have available and then calculate if you are limited in other ways. Since some retirement contributions—like the 401(k)—must be made before the end of the year, don’t wait until you file taxes.
3. Withhold additional taxes on W-2.
After you determine how much you owe in taxes, after all the tax strategies of course, you must then plan how to make the tax payments. One efficient way is to withhold additional taxes on your W-2. This tip has the added benefit that if you haven’t made timely estimated tax payments, it will still count as timely, even if you make the additional withholdings in December. Thus, you avoid estimated tax payment penalties and interest.
4. Reimburse for home office.
Unless you’re taxed as a sole proprietorship, you may not be able to take a deduction for a home office on your personal taxes. Partnerships and S corps typically have to use an accountable plan and deduct that cost from the business return. To make that deduction for the current year, reimburse for the cost of the home office before year-end.
5. Calculate vehicle deduction.
Like the home office deduction, the business use of your vehicle may need to be deducted from the business tax return. This means that the calculation and reimbursement for the business use of your personal vehicle should be done before the end of the tax year.
6. Deduct health insurance.
Small-business owners have the benefit of deducting their health insurance costs, but you must file the correct paperwork to do so. The health insurance premiums should be paid from the business account or reimbursed before year-end. S corps should add the premium amount on the owner’s W-2, partnerships need to add this amount to the K-1, and sole proprietorships will deduct the amount on their personal taxes directly.
7. Pay the state pass-through entity tax.
If you live in a state with income tax that also allows for a pass-through entity tax (PTET), then you need to make the PTET payment before year-end so it’s deductible for the current tax year. The PTET can be tricky to execute in some states, and it may not always be worth it, so talk to your tax professional if you plan to use this tip.
Year-end tax planning for small-business owners doesn’t have to be complicated. There are many easy-to-implement tax tips, like the ones listed above, that only take a few hours of your time but can save you thousands on your taxes. While not comprehensive, the list above is a great place to start because these tips will apply to most small-business owners. More advanced tax strategies are available, however. Work with your accountant or tax professional to ensure you are paying the least allowable amount in tax.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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