2019 Year-End Tax Reduction Strategies
The purpose of this article is to reduce the amount of tax you owe to the IRS and state(s), and to provide a year-end checklist for closing out 2019.
Here are five powerful, easy-to-understand business tax reduction strategies that you can implement before the end of 2019.
1. Prepay Expenses Using the IRS Safe Harbor
You just have to thank the IRS for its tax-deduction safe harbors.
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2019 prepayments cannot go into 2021. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $2,750 each month in rent and would like a $33,000 deduction this year. So, on Tuesday, December 31, 2019, you mail a rent check for $33,000 to cover all of your 2020 rent. Your landlord does not receive the payment in the mail until Thursday, January 2, 2020. Here are the results:
- You deduct $33,000 in 2019 (the year you paid the money).
- The landlord reports $33,000 in 2020 (the year he received the money).
You get what you want—the deduction this year.
The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
Don’t surprise your landlord: if he had received the $33,000 of rent paid in advance in 2019, he would have had to pay taxes on the rent money in tax year 2019. Change in accounting method reporting to the IRS may be required.
2. Stop Billing Customers, Clients, and Patients
Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2019. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)
Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing your customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.
Example. Bob had a very high-income year in 2019 and has good cash flow. He usually bills at the end of each week; however, in December, he sends no bills. Instead, he mails them the first week of January. Presto! He just postponed paying taxes on his December 2019 income by moving that income to 2020.
3. Buy Equipment and Vehicles
With bonus depreciation now at 100 percent, along with increased limits for Section 179 expensing up to $1,020,000, buy your equipment or machinery and place it in service before December 31. You will receive a deduction for 100 percent of the cost in 2019.
Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).
4. Use Your Credit Cards
If you are a sole proprietor or single-member LLC you file Schedule C for your business, and the day you charge a purchase to your business or personal credit card is the day you deduct the expense.
If you operate your business as a corporation or LLC taxed as a corporation, or partnership, and if the business has a credit card in the name of the business, the same rule applies: the date of charge is the date of deduction for the business.
However, if you operate a cash-based business and operate as a corporation or LLC taxed as a corporation, or a partnership, and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction. To take advantage of this deduction in 2019, prepare an expense report and have your business reimburse you before year-end.
5. Get the Right Amount of Deductions
You are in business for profit. Protecting your cash flow is critical for your success.
It is important to know your effective tax rate when making year-end purchase decisions. If you are in the 34% effective tax rate, then every $1,000 deduction saves you $340 and costs you $660 of cash.
Review your tax projection and use this information when you are making your year-end business purchase decisions.
Extension Reminder – An extension to file your tax return does not extend your time to pay!
Note: The value of any strategy for a business owner depends upon their particular situation and the tax laws in effect at the time. Any tax reduction strategy should be reviewed for proper application for your situation. This information is for educational purposes and is not a recommendation by us, unless we have prepared a tax plan for you and recommended the strategy for you.
Our team of experts can help you with your business and personal tax preparation.
Ed Lloyd, CPA, PFC, CTS, CVB
(704) 544-7600 | firstname.lastname@example.org | www.elcpa.com