5 Last-Minute Ways To Save On Taxes For Small Businesses

This year of all years, small businesses can use all the savings they can get—and that includes on their taxes. 

With so many companies facing a starkly different financial situation at the end of 2020 than they did at the beginning, not to mention the additional considerations for businesses that took out PPP loans, this year’s tax filing will likely be more complex than usual. 

That’s why I sat down recently with AG FinTax founder Anil Grandhi, a financial and tax planning expert who’s worked with several Fortune 500 companies to help them reduce their tax liability. Now, he takes those same strategies that he honed at Amazon and SunEdison to his small business clients, helping them save on their tax bill and streamline their finances. 

Here are a few of the year-end tax tips for small businesses that he shared with me.  

1. Put your children on your payroll.

Did your children under the age of 18 help you in your business this year? If so, make sure you pay them—and pay them on a W-2. The reason is that W-2 wages paid by the parent to the parent’s minor child, for work done on the parent’s Form 1040 Schedule C business, are both:

• deductible by the employer-parent, and
• exempt from federal payroll taxes for both the parent and the child.

So if you operate your business as either a sole proprietorship; a single-member LLC taxed on Schedule C; or as a spousal partnership, you face no federal payroll taxes on the W-2 wages you pay your minor child. (And in most states, you also face no state payroll taxes.) 

What’s more, your child also incurs no federal payroll taxes on those wages.

If you operate as a corporation, your child and the corporation pay payroll taxes. However, it’s important to realize that that does not eliminate the benefits; it simply reduces them.

2. Defer or accelerate your income

This is an easy strategy for sole proprietorships, partnerships, and LLCs to manage their taxable income, and should be done based on your tax bracket. This is because these entities are taxed at the personal rate of the owner. 

Deferring income would mean pushing income that you could collect this year into next year, because you believe that next year you’ll be taxed at a lower rate (due to a reduction of income or profits). An example of this would be to invoice a client on January 1 of 2021 instead of December 31, 2020. 

Accelerating it means trying to collect all possible income before Dec. 31, 2020, instead of waiting until January of 2021. So if you believe that you’ll make more money the following year, you’d want to have as much income as possible taxed this year, while you’re in a lower tax bracket. 

3.  Make any major business purchases before Dec. 31. 

If you’re planning on making any purchases of equipment or machinery for your business, make those purchases and place the item into service before Dec. 31. 

This will allow you to get a deduction of 100 percent of the cost of the items. This includes computers, office furniture like chairs and desks, some vehicles, and other equipment used for your business. 

4. Hire your spouse. 

If your spouse is able to assist you in your business, and you are able to pay him or her for it, you could reap significant tax savings. 

To do this, pay your spouse a salary and contribute the maximum amount allowable to a 401(k), including an employer match. An annual salary of $21,500 would result in zero incremental taxes, after maxing out his or her 401(k). 

5. Make a qualifying vehicle purchase before Dec. 31, 2020.

A vehicle purchase can also earn you major deductions and tax benefits in 2020. 

Let’s say that on or before December 31, 2020, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits:

1. The ability to elect bonus depreciation of 100 percent (thanks to the Tax Cuts and Jobs Act)

2. The ability to select Section 179 expensing of up to $25,900

3. MACRS depreciation using the five-year table

4. No luxury limits on vehicle depreciation deductions

Note that bonus depreciation applies to both new and used property, thanks to the TCJA tax reform.

Here’s an example. On or before December 31, 2020, you buy and place in service a used $50,000 qualifying SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent x $50,000). Your maximum write-off for 2020 is $45,000.

Even though year-end is just a few weeks away, small businesses still have time to make decisions that can benefit them by reducing their 2020 tax bill in an ethical and legal manner. And if you have questions about your taxes, don’t hesitate to call in a professional. The cost incurred will be well worth any potential penalties you could end up with by making a simple mistake. And don’t forget—the cost of tax preparation is deductible, too.