As year-end approaches, this is a good time to think about planning moves for individuals and businesses that may help lower your tax bill for this year and possibly next.
This year’s planning is more challenging than usual due to the uncertainty surrounding pending legislation that could increase top rates on ordinary income and capital gains starting next year.
For individuals, whether or not tax increases become effective next year the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions.
If proposed tax increases do pass, the opposite strategies may produce better results for the highest income taxpayers: pulling income into 2021 to be taxed at currently lower rates, and deferring deductible expenses until 2022, to offset what may be higher-taxed income.
Businesses can claim a 100% bonus first-year depreciation deduction for new or used machinery and equipment purchased and placed in service this year, more small businesses are able to use the cash method of accounting than in earlier years, and companies may be able to take advantage of the de minimis safe harbor election to expense the costs of lower-cost assets, materials and supplies.
Consider timing of year-end bonuses. Cash-basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty.
These are just some of the year-end steps that can be taken to save taxes. Contact us so we can tailor a plan that will work best for you.