5 Tax Savings Moves Small Business Owner Should Make Before Year End

With year end quickly approaching, small business owners should do these 5 things before Dec 31st to get some last minute tax savings.  

Get an S Corp Assessment

If your business has done well this year consider becoming an S Corp. Small business at certain income levels can save major dollars by becoming S Corps. The profits from an LLC are taxed for Social Security and Medicare taxes, also known as “FICA”. This means you’ll pay 15.3% FICA taxes on the first $137,700 (the Social Security wage base in 2021) of profits and an additional 2.9% Medicare taxes on all profits above the wage base. With an S -Corp you will take a part of your business earnings as a wage, subject to FICA. The rest can be taken as a distribution, which is not subject to FICA.

You or your accountant will have need to do a LLC vs. S Corp comparison and calculate the tax savings vs the administrative costs ie. Payroll, Corporate Income Tax returns etc. If you choose to convert you will need to file a late election S Corp for 2021 and run payroll before year end. If you miss the deadline there may be still hope for a late election S Corp filing. Contact us for details.

Contribute to a Solo 401K

Although you have until the tax filing deadline to contribute to an SEP or Traditional IRA account, a Solo 401k contribution must be made before year end. A Solo 401k is my preferred recommendation for small business owners since you can contribute 100% of net adjusted business income up to the employee max of 19,500. Plus you can then contribute 25% of your self-employment income as a business contribution for a total of 58k. This will grant you a tax deduction of 58k if you contribute the max and given how well the market has been doing you can end up accumulating a lot of cash.

If you are an S Corp or C Corp Set Up an Accountable Plan

Because deductions such as the home office deduction are not allowed for S Corps and C Corps it is in your best interest to set up an accountable plan to get reimbursed for those expenses through the business. An accountable plan is a plan that follows the IRS regulations for reimbursing workers for business expenses in which the reimbursement is not counted as income. This will get you that home office reimbursement/deduction and save you some tax dollars.

Plan a Company Holiday Party

A holiday party is a nice way to reward your staff or clients for working with you this year and best of all it is tax deductible. Get dressed up, hire a caterer, and have some fun. You may even want to give your employees a small gift for their hard work this year.

Make Large Purchases that Can Count this Year

Now that we are approaching year end, think about necessary spending and consider making some purchases early to get the deduction. You will get the savings for 2021 instead of buying next year and having the wait until 2022 is over to take the deduction.

 Alicia Jegede is a CPA and financial planner at New Gen Financial Planning, LLC. 

Disclaimer: This article is provided for general information purposes only. Nothing contained in the material constitutes advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Alicia Jegede.  All rights reserved.