Tax-Saving Strategies for Your Business

Consider Buying Machinery or Equipment. Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions for the first ownership year. Although the business property expensing option was greatly reduced in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions that you wouldn’t otherwise get. For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.

Passive Activity. To reduce 2020 taxable income, consider disposing of a passive activity in 2020, if doing so will allow you to deduct suspended passive activity losses.

Check Partnership or S-Corp Stock Basis. If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

Set Up a Tax-Favored Retirement Plan. If your business does not already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Even if your business is only part-time or something you do on the side, contributing to a SEP-IRA or SIMPLE-IRA can enable you to reduce your current tax load while increasing your retirement savings. With a SEP-IRA, you generally can contribute up to 25% of your self-employment earnings, with a maximum contribution of $56,000 for 2019. A SIMPLE-IRA, on the other hand, allows you to set aside up to $13,000 for 2019, plus an employer match that could potentially be the same amount. In addition, if you will be age 50 or older as of year end, you can contribute an additional $3,000 to a SIMPLE-IRA. If you’re age 50 or older as of year-end and your business has no employees, a solo 401(k) can allow for a contribution of up to $62,000.

Employ Your Child. If you are self-employed, do not miss one last opportunity to employ your child before the end of the year. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. Children with IRAs, particularly Roth IRAs, have a great start on retirement savings since the compounded growth of the funds can be significant. Remember a couple of things when employing your child. First, the wages paid must be reasonable given the child’s age and work skills. Second, if the child is in college, or is entering soon, having too much earned income can have a detrimental impact on the student’s need-based financial aid eligibility.