Want to pay less tax on your 2019 income? Now is the time to make your moves. In order to be counted, they must be completed by December 31, 2019.
1. Capital Expenditures
Invest in new equipment or make other improvements to your business. Any purchase made in 2019 can be claimed as a deduction on your next tax return.
2. Capital Losses
If you sell stock or another asset at a loss (meaning you sold it at a lower price than you paid for it), you can deduct the amount of the loss up to $3,000. That loss can be used to offset capital gains made on other stock, and reduce the capital gains tax. And if you lost more than $3,000, you can carry the unused balance over to subsequent tax year(s).
Take note, you can’t buy the same or similar asset right back after using it to claim a loss deduction. That’s called a “wash sale” and if you do it within 30 days, the IRS will disallow your deduction.
3. Expense Acceleration
Move some expected early 2020 expenses into 2019. For example, you could purchase 3 months of supplies rather than your usual 1 month. Or pay your January rent early. Just pay for them before December 31, and they’ll be claimable on your 2019 return (which you’ll file in 2020).
If you pay by credit card, as long as the charge appears on your December statement, it’s deductible — even though you don’t pay the bill until January.
4. Income Deferral
In most cases, your tax return reports income only for the year in which you actually received payment for your products or services. Send out December invoices late in the month, so you won’t collect the money for them until January. You won’t have to pay tax on income received from 2020 until 2021.
5. Asset Depreciation
You have two options for claiming depreciation on new and used business assets: taking the full amount in one year or depreciating them over time. If you need the biggest write-off right now, take the full depreciation. However, that may not be best for your business in the long run, so discuss it with your tax advisor.
6. IRA Contribution
This tip relates to your personal income (which may or may not be separate from the business income). The money you pay into a traditional individual retirement account (IRA) is tax-deductible in the year you make the contribution. (Actually, you have until April 15, 2020, to make your 2019 contribution.) Any interest or other earnings the IRA accumulates over its life are not taxed until you retire and begin withdrawing the money — which maximizes their earning power.
These rules don’t apply to a Roth IRA. Contributions are not deductible in the year they’re made but taxed as ordinary income. The bonus of a Roth IRA is that withdrawals from it after retirement are tax-free — ideal if you want more income in your golden years.
Some of these tricks only put off your tax liability to 2021 (on your 2020 return), they don’t actually remove it. Whether that’s a good idea depends on your cash flow needs right now, what you expect them to be next year, possible changes in tax rates and laws, and other factors. Xendoo tax consultants can help you understand your options and plan the maximum tax benefits for your business.