In this industry spotlight, we bring you key insights into tax planning.
In planning for your tax year to end, if your business or businesses are a calendar year end, there are some things for you to do. Keep in mind, regardless of the fiscal year end of your business, you as an individual are a calendar year taxpayer.
With the election of President Biden, it is well understood there is a strong likelihood for a change in the income tax rates including the capital gains rates. Therefore, there is a benefit to capture income this year at the presumptive lower tax rates.
Here are my top 10 things to do to close out the 2020 Calendar Year:
Make sure any bonuses that you want to be paid are paid out, especially to anyone that has an ownership in the business.
Sell any stocks that you do not want to hold, for which there might be a loss. Any stock you want to sell that there is a gain, sell it also. Long Term Capital Gains are any investment held for more than a year. Long term gains get applied to Long Term Capital Losses. The tax rate for individuals (married filing joint) is anywhere from 0% (if your income is under $80,000), 15% (if your income is $80,001 to $496,600) and 20% thereafter. It could have an Alternative Minimum Tax of 3% in some cases. It is the gain above your basis. Short Term Capital Gains/Losses are applied against your income as if it were ordinary income. The tax is based upon your personal tax rate.
Record the mileage on your business auto’s or personal auto’s that are used in the business. You may have taxable income on the mileage that the car has been used personally. Document any business dealings associated with meals or entertainment events as some portion of that might be deductible to your business.
Estimate your Bad Debt Write Off for the year, as that will reduce your business profits and therefore reduce your business taxable income.
Determine how much cash you will need to kick off the new year.
Purchase any equipment or pay for services that you want to write off or use Section 179 (the super accelerated depreciation statute)
Due to the PPP loans and possible forgiveness, identify the expenses associated with that. If the loan is forgiven, the expenses are not deductible. If the loan is not forgiven in 2020, and you expect it to be forgiven in 2021, those expenses are still not deductible. So, you need to estimate a higher pre-tax profit without those expenses.
Do not be afraid to have a loss and work with your tax practitioner to recapture taxes from a previous year. Recapture of taxes paid is a great funding method.
Plan your budget and pricing for 2021. Do not wait. Be ready with an adjusted price list and merchandise list for January 1.
If you are confused and unsure about any of this, contact Foresight and we will be happy to work with you on all of your options.