Year-End Tax Planning for Businesses

Important Tax Changes to Consider:

You may be required to start treating some of your contractors as employees.  The factors which the government looks at to determine if someone is an independent contractor versus an employee have changed.  If you are controlling when, how, or where the person performs services, they may be your employee.  The penalties for misclassifying a worker as an independent contractor are substantial.  Even for a small payroll, the penalties can be tens of thousands of dollars.  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. 

Businesses with no retirement plan and more than 50 employees must register by 6/30/2021 for the new CalSavers program.  This 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.  Businesses with more than 5 employees must register by 6/30/2022.

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 2020 and 2021 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 2020 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 2019 business records can be packed up.  I like to keep last year's records easily accessible for one for year.  Mark the 2019 boxes “Destroy 2024.”  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