Once you have entered the last quarter of your fiscal year, it's time to think of any final steps you can take as a business owner to lower your taxes for the year. Here are five suggested things to consider at year-end to lower your tax bill.
If you’ve been thinking about buying equipment to use in your business--whether it be a car, computers, software, or anything else--do it by the end of the year. In all likelihood you’ll be able to deduct the entire amount you paid for the item in a single year instead of having to depreciate it over several years (this is not true for passenger cars, however, for which annual deductions are capped). In recent years, there have been extremely generous first-year tax deductions for business property purchases.
IRC Code Section 179 allows you to deduct in one year most tangible personal property you purchase and use over 51% of time for your business. The annual limit for this deduction is $1 million under the Tax Cuts and Jobs Act. You can not deduct more than your net taxable business income for the year under this provision. There is also a first-year bonus depreciation available for most purchases of new and used equipment. For more information, see Nolo's article 50% Bonus Depreciation Extended Through 2019.
One area where successful self-employed people are often better off than employees is retirement plans. The government allows the self-employed to set up retirement accounts specifically designed for small business owners. These accounts provide enormous tax benefits--tax deductions for plan contributions and tax deferral on investment earnings until retirement. There are an array of retirement accounts available--solo 401(k)s, IRAs, SEP-IRAs, Simple IRAs, and Keogh plans.
How much you can contribute each year depends on the type of plan you have and the amount of your net earnings from self-employment. For example, the maximum contribution for a solo 401(k) plan is 20% of your net self-employment earnings plus an elective deferral contribution of up to an annual threshold amount. Check the IRS website for annual contribution limits.
You can contribute to these plans and take a deduction up until the time your tax return for the year is due--April 15th or October 15th if you file an extension. However, you must establish a solo (401)(k) by December 31st to take deductions for your contributions in that year.
If, like many investors, you have stocks that have gone down in value since you purchased them, sell enough before the end of the year to have at least $3,000 in losses. If your total capital losses exceed all your capital gains for the year you may deduct up to $3,000 of these losses from your ordinary income--that is, the income you make from your business. If your overall capital loss is more than $3,000, the excess carries over to the next year. For details, see Donating Stock to Charity.
If, like most self-employed people, you pay for your own health insurance, consider opening a Health Savings Account (HSA). An HSA is like a health IRA that is coupled with a health insurance policy with a high deductible. You can deduct contributions to your HSA and then use the money to pay almost any uninsured health-related expense. And you don’t have to pay any taxes on these withdrawals. If you set up your HSA and contribute by December 31st, you can make a full year's worth of deductible HSA contributions for that year. Check the HSAcenter.com website for annual contribution limits.
If you itemize your deductions, you'll lower your income taxes by donating to charity by the end of the year. You can donate money, property, or both, to any qualified charity and take a deduction. If a charity has obtained a determination letter from the IRS recognizing its status as a 501(c)(3) public charity, then it is qualified for tax purposes and donations to it are deductible. Many nonprofits include copies of their IRS determination letter on their website and their taxpayer identification number on fundraising solicitations so donors know they can deduct donations to their organization. The only 501(c)(3) organizations that are automatically considered qualified organizations (without a determination letter from the IRS) are churches and other religious organizations.
The IRS maintains a list of qualified organizations that you can search on its website by using Exempt Organizations Select Check. You can also call the IRS at 877-829-5500 to determine if an organization is qualified. Other organizations maintain even more extensive lists of nonprofits. For example, the website www.guidestar.org lists over 1.5 million nonprofits.
Make sure to keep records of all your donations. For more details on charitable deductions, see Deducting Charitable Contributions.
For a guide to all types of deductions for small business, see Deduct It: Lower Your Small Business Taxes, by Stephen Fishman (Nolo).