small business taxes

Important Tax Moves You Should Make Before Year End

Gene Marks

Transcript

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Gene (00:02):

Hey everybody, this is Gene Marks and welcome to this week’s Hartford Small Biz Ahead podcast. Thanks for joining me. Let’s talk taxes, shall we? We’re really less than two months away until the end of the year. It drives me nuts when people want to plan for their taxes on December 29th. That’s not the way to do it. The way to do it is right now, while you still have some time to make some moves. That is the biggest mistake that most small business owners make when it comes to their taxes. It’s like taking the right steps, like too late. I get it. No one enjoys thinking about taxes, but for many of us, it’s the single most significant expense we incur every year. And with just a little forethought, there are plenty of things we can do to keep this expense at a minimum.

Gene (00:48):

So, what steps should you and I be taking right now? Well, the first and most important thing to do, and as early as possible, so I’m talking like now, is to meet with your accountant. You wanna review the year together. You wanna make estimates for the remaining months. You wanna make sure you’ve paid in all of your estimated taxes to date, or made changes to those estimates because you don’t wanna pay in too much or even too little. You also wanna take the time to make sure all of your books and records are in order. Organize your files, ensure that all of your documentation is readily available for your accountant to review, and then maximize your deductions, right? You know, one of the many things that clients overlook, by the way, is keeping good travel logs as well. That way you can take full advantage of that 58.50 cent per mile deduction that the IRS allows.

Gene (01:36):

Many companies, they don’t take the time to keep these records and you’re missing out on significant tax savings, particularly during times of high energy costs. Another strategy worth consideration is to buy capital assets like furniture and fixtures and machinery and equipment and even automobiles. Most businesses can deduct up to a million dollars 80,000, a million 80,000 in expenditures for these items. And the main requirement is that the asset has to be placed into service by the end of the year. So that means that even if you finance the purchase and you manage to defer your loan payments, you can still get the full deduction for the purchase price. How about another popular move? Pay out bonuses before the end of the year. I mean, despite the potential of an economic slowdown, We all know this. 2022 is actually a pretty decent year for at least many of my clients. So, I’m talking to them about paying out bonuses to their employees before the end of the year if it’s possible.

Gene (02:37):

Those that can pay out bonuses will not only reduce an employer’s taxes, right? It’s a deduction that you’re taking, but it could help to retain key people in these times of tight labor. Rather than giving the money to the government, give it to your employees, it’s not a bad tax move to take. How about something else? Clean up your balance sheet. Accelerate your expenses, defer income. If you have overdue accounts receivable that’s been out there for a long time from customers, take a hard look and consider writing them off because you can’t get a tax deduction unless they’ve been removed from your balance sheet, right? And by the way, the same goes for your inventory. Take a walk around your place and dispose of any old materials lying around and write those amounts off your balance sheet too.

Gene (03:21):

If you’re a cash basis taxpayer, you should like look at your expenses like insurance and other purchases that you can possibly accelerate into this year to take that deduction. And conversely, if you’re able to defer legally cash collections until 2023, go ahead and do that, and that’ll help reduce your income in 2022. Another move, retirement plans both for yourself and your workforce. For example, if your company has a 401K plan, both you and your employees can save yourself up to $20,500 this year tax free. And assuming your company’s in compliance with IRS discrimination rules, you and your employees can receive up to an additional $40,500 in tax free matching contributions. So total $40,500 could be put away for the year. People over the age of 50 can even receive even more. The employer’s matching contribution can be made as late as April 18th, 2023 for the 2022 calendar year.

Gene (04:21):

Now, many business owners I know have outside investments and unfortunately, those investments have fallen this year. So if you’re one of them, you may want to consider selling some of these investments and offsetting those capital losses against any capital gains you may have so that you don’t have to pay taxes on the gains. If your capital losses exceeds your capital gains, you can offset up to $3,000 of those excess losses against your ordinary income, too. Under IRS rules, you have to wait 30 days if you wanna buy any of those stocks back or otherwise, you’ll incur penalties. Something else, if you have a regular individual retirement account or an IRA, you may wanna consider converting it to a Roth IRA because of the down markets, right? You can do these Roth IRA conversions. You pay taxes on the conversion, but the tax bill is less because the assets have declined.

Gene (05:10):

And then going forward, after you put it into the Roth IRA, it then appreciates tax free. So, that’s another opportunity to do that and to reduce your taxes. Finally everybody, start thinking about 2023. If you’re commingling your personal and business transactions in one bank account, you should open up a new bank account and segregate those transactions for better reporting. If you’re just reporting your business income on your personal tax return using your Schedule C, this may be a good time to incorporate yourself and create a new tax filing entity like an S-corp or a partnership. By doing that, you can separate your business and your personal financial activities and give yourself more legal protections and take distributions instead of salary to lower your taxes. If you’re an S corporation, remember, you can pay a reasonable salary and then take distribution so that you could potentially avoid the 15.3% self-employment tax.

Gene (06:04):

Let’s recap all of this. All right. Number one, meet with your accountant. Make sure your estimates are paid in. Adjust your estimates, right? Number two, keep good travel logs. Take advantage of that 58.50 cent per mile deduction that the IRS allows, particularly if you’re like a freelancer or a sole proprietor. Number three, buy capital assets. Put them into service this year. You could take a full amount of depreciation up to about $1.1 million as long as you put it into service. You can even finance it and start paying for it later on. Number four, pay out bonuses before the end of the year. Give your money to your employees instead of the government. Why not? Number five, accelerates your expenses. Defer your income, and clean up your balance sheet. Get rid of old receivables, get rid of old income. Take advantage if you’re a cash basis taxpayer.

Gene (06:58):

Number six, maximize your retirement plan contributions this year, particularly to your 401k. Number seven, if you have outside investments, sell them at a loss. Offset that loss against the gain plus another 3,000 towards your ordinary income. Wait 30 days and buy the stock back if you really wanna hold onto the stock. Number seven, eight, what number am I on at this point? If you’ve got an IRA convert it into a Roth IRA, you’ll pay taxes, but because your assets probably decline this year, your tax bite will be lower. And then as the market recovers and the assets start appreciating, you won’t be taxed on that appreciation in a Roth IRA. And finally, think ahead to 2023. Un-mingle your personal and business dollars into separate bank accounts. Maybe start thinking about setting up like an S corporation or a partnership as well.

Gene (07:53):

There are a lot of advantages to doing that, including avoiding or minimizing your 15.3% self-employment taxes. That’s a lot of moves, right? And some of these, if not all of them, could apply to you, but now is the time to do it. Don’t wait until the end of the year. Let’s get on it. Let’s make these moves. Let’s save our taxes. It’s such a significant part of our yearly income. Might as well put that money in the bank rather than giving it to the government. Right? Hope you agree. Hey, my name is Gene Marks. You have been listening to the Small Biz Ahead Podcast from The Hartford. If you want some more tips or advice in help running your business, visit us at SmallBizAhead.com or SBA.The Hartford.com. I will be back next week with another episode of the Small Biz Ahead Podcast. I look forward to speaking with you then. Take care.

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