Year-End Tax Planning for Businesses

Important Business Tax Changes to Consider:

LLCs, partnerships and S corporations:  We need to discuss the new California SALT cap workaround.  It is a way to pay an extra tax to the state, get it back on your personal tax return, and reduce your federal income, essentially receiving a tax deduction.  This is a way around the $10,000 cap on the tax deduction for state and local taxes.  To receive the credit on your 2021 tax return, the payment must be made by 12/31/21, so be sure your accounting is up-to-date.  If pending federal legislation removes the SALT cap, all of this goes away.

You may be required to start treating some of your contractors as employees.  The factors which California uses to determine if someone is an independent contractor versus an employee have gotten very narrow, and the penalties for misclassification are unbelievably high.  Here is my web page for more information.

The rules regarding charging and remitting sales tax in California have changed.  Any retailer with total sales of tangible property, including sales for resale, in excess of $500,000 is considered engaged in business in every district that imposes a district tax and so must collect and remit district tax.  Other states have imposed similar requirements. 

California businesses more than 5 employees must register by 6/30/2022 for the new CalSavers program unless the company already has a retirement plan.  CalSavers is essentially a payroll deduction Roth IRA program.  Employers will be required to withhold contributions from each employee's paycheck unless the employee opts out.  The deadline for businesses with more than 50 employees was 6/30/2021.

Year-End Tax Planning for Businesses

If your business is a cash-basis taxpayer (if you aren't sure, ask me) and you believe that your 2021 and 2022 profits will be about the same, then pay all of your January bills in December to pull the tax deductions into this year.  Using your credit card by 12/31 counts as paying this year, even though you will pay the credit card bill next year.  (Note: only works with bank credit cards, not retail cards, such as your Office Depot or Staples card.)

Also, if you need to purchase equipment (including autos) you might want to do so before the end of the year. 

If you are thinking about setting up a retirement plan, it is simpler to set up a 401(k)s, including a "solo 401(k)" before 12/31.  However, new tax laws have extended the deadline until the due date of the tax return, including extensions.  SEP-IRAs have always had the later deadline.

Also, if you are setting up a retirement plan, talk to me about the Employer Auto Enrollment Credit for 401(k)s ($500) and the Small Employer Pension Plan Startup Costs Credit (up to $5,000).

If your spouse or child is active in your business, consider hiring them so that you can contribute to his/her retirement account, too.

If your LLC, partnership, or S corporation has lost money, be sure that you have sufficient basis to be allowed to deduct the losses.  This is especially tricky for S corporation owners.

If your S corporation has had a good year, be sure you have paid enough salary to the officers to avoid the IRS hot audit target.

Tax items of general business interest:

The deadline for filing Forms 1099 will be here soon.  Are you missing any legal names, addresses, or tax i.d. numbers?  If so, ask your contractors to give you a signed Form W-9 right away.

Print a hard copy of your 2021 business calendar.  This will help document your business-related meals, travel, and car mileage.  Don’t trust the electronic version to be uncorrupted and available two years from now during audit season.

Make a backup of your QuickBooks file or other bookkeeping system.  Take a picture of the odometer of the car you use for business.

Review your plan for recovering from a cyberattack.  Consider adding coverage to your business insurance.  It's been estimated that 60% of small companies that suffer a cyberattack are out of business within six months.

If your business involves maintaining an inventory, count your inventory as close to December 31st as possible.

Most of your 2020 business records can be packed up.  I like to keep last year's records easily accessible for one for year.  Mark the 2020 boxes “Destroy 2025.”  But see my document retention page for information about what to pull out and keep longer. 

You may also want to look at these pages:

Year-End Tax Planning in General

Year-End Tax Planning - Good Year

Year-End Tax Planning - Bad Year

Bess Kane, CPA