Tracking various deductions, deadlines and credit could get a bit tricky. With that here are a few tips you can try during the year to up your deduction amount. While tactics such as timing your income and expenses need to be done before year-end, the following can be done all around the year.
Buy equipment that allows depreciation deductions
As a business, you should evaluate each piece of machinery, equipment, and in some cases even real estate to see how much depreciation you can write off. The method of accelerated depreciation can be used via Section 179 of IRS and bonus depreciation. When buying any machinery or equipment do check if you can write depreciation in the very first year you own or use the equipment.
Section 179 allows business owners to subtract property costs from qualified equipment when they are used as a service. Deductions under section 179 can be availed by doing the following
-Start using the purchased qualified property in the first year
-Keep proof of all essential records during tax filing- such as date of purchase, setup, freight cost, date when you started using the property, etc.
-Combine all the qualified figures of the property
-Fill out IRS Form 4562 and include that in your business tax return to apply for deduction under Section 179.
Bonus depreciation gives you an added advantage when you buy an asset. Under the Tax Cuts and Jobs Act, the IRS has also bumped up this tax break from 50% to 100% for all assets put in service from 27th September 2017 through 1st January 2023.
Bad debt write-offs
Towards year-end, do a thorough revisit of all your customer accounts. Talk to your team to see which ones won't be paying you. Categorize those as bad debts and debit these from your business income.
Cost of gifts
According to IRS, you can subtract up to $25 per person from the total amount of gifts given to vendors. You should also look into any costs of entertainment. Although, accounting for them could somewhat be a grey area. But as a rule of thumb, the costs are deductible as long as they are directly related to business.
Set up a retirement plan
Setting up or financing a retirement plan for your employees or yourself is another good way of getting more deductions. To do this, ensure that the retirement plan is valid under the IURS rules. This way you can take the benefit of deferring taxes. The most common examples of retirement plans are 401(k) or 403(b)
Qualified business income (QBI)
The Qualified Business Income deduction came forward in 2018 under the Tax Cuts and Jobs Act. This can be used in conjunction with the usual business deductions. as per the QBI, if your business is a pass-through entity- that is your pass down your income to your shareholders and you are a sole proprietorship, a partnership, or an S corp, then you may be eligible for around 20% deduction from, your business income. You can qualify for this if your taxable income on under $$157,500, or $315,000 (for people filing joint returns)
This is the government's way of encouraging and rewarding businesses for taking or not taking certain actions for the greater wellness of society. Some instances where your business can qualify for a tax credit are: following ESG standards, running an inclusive business, helping disabled employees and proving employees with health cover, etc. Check with your accountant which opens you can qualify for.
Hire a tax advisor
In the end, outsourcing this to a professional tax expert can help ensure you get the best deal out there. A professional can make certain that your business avails the maximum amount of deductions. They keep a tab on important deadlines and dates. Try finding an enrolled agent. These are highly qualified folks who know the ins and outs of business tax and they have worked for the IRS at some point
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