Council Post: Six Year-End Business Income Tax Deductions To Keep In Mind All Year

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Taruna Kanani, President and Founder KB Tax Divider CPAs Specializes in creating customized tax strategies for small business owners.

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Even in a new year, understanding six powerful business tax deduction strategies can help you make the most of your claims before the calendar reaches December 31.

1. Disproportionate deduction?

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At the end of the year, you may have more business expense deductions than business income resulting in a tax loss — also known as a net operating loss (NOL). As long as you document deductions and claim eligible deductions, you can benefit from this tax loss as it creates tax benefits for you in the future. This is especially true if you are in the startup phase or growth phase or if the COVID-19 pandemic has affected your business. This is especially beneficial if you have income from other sources because you can use this NOL to offset income from other sources.

2. Put Billing on Hold

It is, in fact, a once-tested rock-solid strategy for reducing taxable income in the current year. You can put client billing on hold till December 31, 2022 (especially if you file tax on cash basis). The customer/s do not make the payment till the bill is received.

Example: A business coach, typically bills his clients at the end of each week, but may skip billing for the month of December and bill the first week of January instead. Voila! He deferred the payment of taxes by moving the December 2022 income to January 2023.

3. Prepaid Expenses

The IRS has created a rule that allows you to prepay your expenses up to 12 months in advance without being challenged by them. This is because it is considered deductible and thus allowed for tax deduction under their safe harbor rules.

Example: Let’s say the monthly rent is $2000 and you want to deduct $24,000 in rent deductions this year. You can mail a check by December 31, 2022 for a rent of $24,000 to cover rent for the full year of 2023. The landlord will receive this payment in 2023. Many times when you pay in advance, you are eligible to get an additional discount, an additional benefit. It works like this:

  • You have deducted $24,000 in 2022 since you paid in 2022.
  • The landlord will report $24,000 as rental income in 2023.

4, purchase equipment

Purchase equipment or machinery or vehicle and put it in service before December 31, 2022, and qualify for 100% bonus depreciation or depreciation under section 179 for purchase in the 2022 tax year.

5. Time to purchase using a credit card

Typically, the day you charge your credit card to make eligible purchases is the day you can write off as a business expense. This gives the opportunity for last-minute purchases of office supplies and other business necessities.

6. Qualified Improvement Property

A Qualified Improvement Property (QIP) is any improvement to the interior of non-residential buildings if the building is initially put into service after the date it was put into service. Non-residential building includes office buildings, retail stores or shopping centers. Before the Tax Cuts and Jobs Act, QIP was subject to depreciation over 39 years, just like real property. However, it is not considered a real asset, rather it is treated as a 15-year asset. This means you can avail 100% bonus depreciation or spend it for immediate write-off under section 179. To receive a write-off for a QIP, you must have the QIP in service on or before December 31, the end of the tax year.

The first thing you should do to save money on taxes is to claim all of your business deductions as soon as possible. The more you can claim as a deduction from your taxable income — whether it’s for purchases or overhead costs like rent — the less money flows into the regular tax bracket where higher rates apply.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.


Businesshala Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. am i eligible?


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