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With just 2 weeks left in 2020, now is the time to act if you want to save on your taxes. 

If you’re like most agency owners, you’re not making the best decisions for your business taxes:

• You’re not optimizing owner pay
• You’re set up in the wrong entity structure
• You’re leaving deductions on the floor

Or worse, you don’t have a tax plan at all. You’re trusting your CPA to make the best decisions for you, despite the fact that he’s just running basic numbers through his software and telling you how much to pay.

But, with a little effort right now, you can be on your way to saving money on your taxes for 2020. Here’s how.

Prepay Expenses with IRS Safe Harbor

The IRS safe-harbor rule allows cash-basis taxpayers to prepay and deduct certain expenses up to 12 months in advance without contest from the IRS.

 Qualifying expenses include vehicle lease payments, rent, software and business insurance premiums.

Here’s an example. You pay $5,000 a month on rent and want to capture an additional $60,000 deduction this year. So on December 31, send a $60,000 check or ACH to your landlord for the entire next year’s rent. Your landlord receives the payment Tuesday, January 5, 2021. 

You deduct $60,000 in 2020 (the year you paid) and your landlord reports taxable income of $60,000 in 2021 (the year he received the money). 

Everyone wins. You get to deduct an additional $60,000 this year and your landlord gets a year of rent paid up front. 

Rent Reimbursement

Through an accountable plan, you can reimburse yourself for your home office. Too often these deductions are left on the table. Implementing an accountable reimbursement plan will let you capture these in 2020 and years to come. 

Deductions that apply to your home office can include depreciation, interest, rent, internet, utilities and property taxes. Reimbursement needs to be done no later than December 31.

Buy Equipment with Bonus Depreciation

Bonus depreciation is a way to accelerate depreciation. (Remember, depreciation allows a business to write off the cost of an asset over its useful life, or the number of years it will be used in the business.) Bonus depreciation allows a business to write off more of the cost of an asset in the year the company starts using it.

For 2020, bonus depreciation can be captured at 100%. So go buy your computers and tools before December 31, and get a deduction for 100% of the cost this year.

Qualifying expenses to make before the end of the year include both new and used personal property such as computers, equipment, desks, chairs, and other furniture (think home office). 

Don’t worry about running a loss this year (NOL carryback)

This one can get complicated, so stay with me. 

A loss carryback describes a situation in which a business experiences a net operating loss (NOL) and chooses to apply that loss to a prior year’s tax return. This results in an immediate refund of taxes previously paid by reducing the tax liability for that previous year.

Before 2018, you could carry back your NOL two years and get a tax refund from prior years. The Tax Cuts and Jobs Act (TCJA) eliminated this and made it so you can only carry a NOL forward, and it can only offset up to 80% of your taxable income in any one future year.

 But, the Coronavirus Aid, Relief, and Economic Security (CARES) Act implemented this year essentially removed this clause. 

It states that NOL from tax years 2018, 2019, and 2020 can be carried back five years to request refunds against prior taxes paid, at a rate of 100%. 

The bottom line on this one:

If your business deductions exceed your business income in 2020, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL. Through the CARES Act, this NOL can be carried back to 2015 or any year between now and then, and get you a refund on taxes you already paid. 

Get all of your deductions documented before the end of the year and don’t worry about furthering a paper loss this year. 

Wrapping it up

The good news is that these are just the low-hanging fruit. With proper tax planning, even more can be done to save you on taxes this year and in coming years.

Unsure on whether any of these apply to your situation? Print out this article and take it to your CPA to get the conversation started.

Or, click the link here: Become an Agency CPAs Client to schedule an appointment on our calendar.