5 Actionable End of Year Tax Hacks
It’s a bit of an oxymoron to believe that the IRS will give you money back if you don’t owe any taxes. But if you do owe some money here are a few strategies that can reduce the money you may owe.
You must use these tips before the end of the year so let’s get started right away to ensure you don’t pay next year.
Tax Hacks 1: Prepay Expenses
Did you know that the IRS lets you pay expenses for next year and then you can deduct them for this year? Now you can only prepay 12 months of qualifying expenses under the safe-harbor rules so don’t try and pay two years of lease payments for your vehicle as it won’t count.
To use the safe harbor rule, you need to be a cash-basis taxpayer, meaning you recognize your expenses when you make them.
You would use this if you have a big tax bill. So, if you’ve figured out that you may owe a bunch of money because you make some money this year then go ahead and pre-pay.
Let me give you an example of how this works.
Let’s say you did an estimate on your taxes and based on last year’s return you ended up owning $10,000 to the IRS. You don’t want to pay that much so you can pre-pay some expenses.
You pay $1500 a month for rent and you would like to get a deduction this year. So on December 31, 2019, you mail a rent check to your landlord to cover six months’ worth of rent. Your landlord does not receive the payment in the mail until Thursday, January 2nd.
You deduct $9,000 in 2019 (when you paid the rent
Your landlord will report his earning in 2020 when he received the money.
You’ve now reduced your taxable income by 9,000 so you only owe $1,000 for 2019. Your rent is paid for the first six months of the year. Your happy because you didn’t have to give the IRS money, your rent is paid for six months. Your landlord is ecstatic because he has money and he won’t have to worry about your being late with your rent.
Andrea's Tip
Make sure that you let your landlord know what’s going on so if he by chance receives the check-in 2019, he would have to pay taxes on it so don’t screw your landlord.
Qualifying expenses include things like lease payments on vehicles, rent payments on offices and machinery, and even insurance premiums.
Just a Note
Proof is a big thing with the IRS make sure you when you use USPS online tracking and then make sure you print out or save to the cloud the delivery and receipt tracking results. Don’t let it disappear.
Tax Hack 2: Stop Billing Customers, Clients, or Patients
It may seem weird but if you need to reduce your income the best way is to not invoice or bill your clients until next year. Most of your clients won’t pay until they get an invoice so if you don’t send it they probably won’t pay.
If you wait to bill your clients until January, you don’t have to recognize the income until 2020. Please note you must be a cash basis for this to work.
Tax Hack 3:Â Upgrade Computers or Equipment
Bonus depreciation is a 100 for 2019 so if it’s time to upgrade your computers if you buy them before December 31st you can take 100 depreciation this year to reduce the cost. You can check out the strategy for bonus depreciation in the Big Fat List of Small Business Tax Deductions for more information on how it works.
Tax Hack 4: Use Your Business Credit Cards to Office Supplies
Most businesses still have some office supplies that are needed next year and beyond. If you need a bunch of paper and use your credit card at the end of the year you can deduct the expenses right away. At least for a single-member LLC or sole proprietor filing a Schedule C for your business.
If your business is a corporation and the corporation have a credit card in the name of the corporation the same rules apply.
Andrea's Tip
Do not use your personal credit card, please.
Tax Hack 5:Â Don’t Assume You Have Too Many Deductions
It may be that your business deductions exceed your business income which will mean you have a tax loss for the year. A Net Operating Loss (NOL) is not uncommon in a brand-new business or even with an ongoing successful business.
Before the Tax Cuts and Jobs Act, you could carry back your NOL for two years and get immediate tax refunds. Now, you can only carry your NOL forward, and it can only offset up to 80% of your taxable income in any one future year.
For example, let’s say you have an NOL of 5000. Next year you have a taxable income of 10000 you can write up 5000 off your taxable income. But if you have 3000 taxable income in 2020 you can only write off up to 80% of the 3000.
Don’t be worried about deductions and you should NEVER stop documenting them and claim all your rightful deductions. Just because you can’t use them now doesn’t mean you can’t use them in the future when they change the tax laws again.
Putting it All Together
When it comes to taxes, business deductions are king just like cash. The more deductions you can claim, the better because you’ll pay fewer overall taxes.
Claim all your legitimate deductions you can’t have too many and don’t avoid deductions that you think could be a red flag. First, it’s unlikely you could have enough deductions to create a red flag. Second, no one knows what those flags are. Third, if it’s a deduction is legitimate, and you have the documents to back it up, it doesn’t matter if the IRS audits you’ll win.
If you need some help making some tax plans. Make an appointment today!
Happy Holidays!
Andrea
