Your company serves a human need. The better you meet those needs, the more you grow, the more people you can serve and employ, and the more lives you can transform. That’s the beauty of capitalism. Don’t let minimizing taxes distract you from maximizing value.
I tell the directors that paying more taxes is the greatest indicator of your success. There is only so much we can do to minimize taxes. After all, we have to pay Uncle Sam his share. But we never want to pay more taxes than required by law.
Never make a business decision just to lower your taxes. Buying an asset that doesn’t bring you a high return on investment in order to get a tax deduction is a bad decision.
Why? Buying assets as perks that don’t offer a high return on investment will distract you and your team from your primary goals. These goals should be to maximize value for shareholders, customers and employees.
Owners and team members should receive a market salary for what you do and earn on what you own. This is an important distinction that I learned from Greg Crabtree at www.simplenumbers.me. If you focus on the bottom line, so will your team.
Now let’s talk about tax saving ideas. If any of these sound good to you, discuss them with your tax advisor. The rules are difficult.
1. Buying Assets: This is one of the first things that pops into our minds when we think about year-end tax planning. Again, don’t buy any assets that you don’t need here. Assets are written off and you pay taxes to own them. Only buy assets that offer a high return on investment for your business.
If you are making asset purchases that meet the criteria above, year end is a good time to make them. The new tax law has given us a 100% bonus write-off and expanded the rules of Section 179 that allow us to deduct many important purchases that were not previously allowed.
2. Cost Segregation: Cost segregation analyzes real estate investments that you have bought or built in order to maximize depreciation costs as quickly as possible. The new tax law makes this strategy even more valuable by increasing bonus depreciation from 50% to 100% and expanding qualifying assets.
3. Change in accounting policy: The new tax law allows companies with gross revenues of up to $ 25 million to use accounting policies that were only available to much smaller companies. Your company may now be able to report on a cash basis. This is another great opportunity to maximize current year’s deductions and defer taxes.
4. Timing of income and expenses: If you are eligible to use the cash method for tax purposes, you should consider the timing of your income and expenses as you near the end of the year.
If you expect to be in the same or a lower tax bracket in 2021, you can minimize your taxable income for 2020 by sending invoices a little later. You can also prepay some 2020 expenses. There are limitations to this strategy. Therefore, contact your tax advisor.
5. Maximizing Qualified Business Income Deduction: The 20% QBI deduction was a key element of tax reform. For tax years 2018-25, the deduction can be up to 20% of the QBI of a pass-through business owner.
There are several restrictions on QBI deductions that can increase or decrease your allowable QBI deduction. Talk to your tax advisor to make sure you optimize your deduction for that year.
6. Retirement Plans: Establishing and maximizing contributions to retirement plans is always a great way to defer taxes. Make sure to maximize this deduction.
Side note: I love saving taxes today, but is the best long-term move to defer tax on my retirement assets? The argument about saving after tax for retirement with Roth accounts is gaining momentum in my head. If you think you are in lower tax brackets when it comes to drawing on your retirement savings, deferring tax by saving before tax is right.
I am not sure if this will be the case with me and many others. I do not see that taxes are falling with our national debt as it is. By saving after tax, your AGI (Adjusted Gross Income) will also stay lower in retirement. AGI determines social security tax liability and how much you pay for Medicare. Think about saving with pre-tax or post-tax accounts for retirement.
7. PPP loans: Not a tax step, but something to consider. PPP loans should be tax free. As of now, the IRS will not consider taxable income for lending but will not allow deductions for expenses related to lending. Most of the companies did not count the PPP loans as revenue. Therefore, their taxable income could be much higher than what is reported on their books (by the amount of PPP loans granted).
Many people struggle against the tax liability of these loans, but we must be willing to pay the taxes.
8. Changes to the CARES Act: Due to the COVID pandemic, many changes have been made to tax law. Here are some to think about.
– Increased cap on business interest expense from 30% to 50% of adjusted taxable income for tax years from 2019 and 2020 for C and S companies. The 50% limit only applies to tax years from 2020 for partnerships.
– Research and development tax credit. Did the pandemic force you to develop tailor-made technologies or processes? Your expenses may be eligible for a research and development tax credit.
– Retransfers and restrictions on net operating losses. The CARES Act lifted the redemption restrictions and allowed a five-year redemption of NOLs from 2018, 2019 and 2020. In addition, the 80% limitation was lifted until the years after 2020.
– Qualified improvement property. QIP is an improvement in the interior decoration of non-residential buildings with the exception of elevators, escalators and structural changes. It was supposed to be a 15 year property and eligible for bonus write-off but was mistakenly given a 39 year lifespan. The CARES law stipulated this with effect from January 1, 2018. You can now go back and apply for a bonus write-off for each QIP starting January 1, 2018.
We couldn’t cover everything in this article, but I hope this gives you some great ideas to discuss with your accountant.
As always, if I can be of any help, you can reach me at (229) 244-1559.
Curt Fowler is President of Fowler & Company and a Director at Fowler, Holley, Rambo & Stalvey. He is committed to helping leaders build great organizations and better lives for themselves and the people who lead them.
Curt is a syndicated business journalist, keynote speaker and management consultant. He has an MBA in Strategy and Entrepreneurship from Kellogg School, is a CPA, and a pretty good guy as defined by his wife and four children.