Johnson Nathaniel

It’s August, and you most likely submitted your 2021 tax return months ago. For most, taxes are the last thing they want to think about once they’ve finally submitted their return. The truth is, however, thinking about and planning for tax season can make a monumental difference when it comes to your bottom line.

Depending on your circumstances, proper planning could lead to a significant reduction in taxes paid, which means more money goes where it matters most: growing your business.

What is tax planning?

Tax planning is much more than coming up with an estimate of your tax liability and how much you should leave aside to pay your taxes. At a high level, it’s taking a look at the entirety of your financial situation and ensuring that all facets work cohesively to ensure you pay the least amount of taxes legally possible.

The planning process considers various factors, including the size and timing of purchases, expense planning, deduction and credit opportunities and more. This process will also help you select the optimal investment and retirement plans that complement your overall financial strategy and filing status.

Should I have a tax plan?

Consider this: Taxes are the single largest expense most will pay year to year. Last year alone, the government collected $4.05 tril in taxes. Truth is, in your lifetime, you will almost certainly give more of your money to the government than you will spend on any other single endeavor. Hence why tax planning is critical.

A tax plan is one facet of an overall sound financial strategy, albeit a critical one. Unfortunately, however, many people overlook this important aspect, and in turn, end up overpaying significantly at the end of the year. Whether you’re just starting your business or a seasoned veteran, it’s never too late or too early to build a plan.

Whether you’re going to create a plan on your own or partner with a professional, you should start taking action. Getting your plan in place is step one in getting ahead of the competition, allocating more money towards business growth and ultimately reducing your overall tax liability.

Through October 2022, you can buy Series I bonds that pay 9.62% interest; and you receive that rate for 6mos from the time of purchase.

What happens next?
✔ On 11/1/22, the U.S. Treasury sets a new 6mo rate equal to the fixed rate (currently 0%) plus the Consumer Price Index inflation rate.
✔ The interest you earn for the 1st 6mos gets added to the principal, and you earn interest on that interest during the next 6mos (think compound interest).
✔ Sounds too good to be true. There’s a trick, right? Not really, but the govt keeps your $$ (both your principal and interest) for at least 1yr.

The Mechanics?
✔ You’re buying a 30yr bond. The interest rate changes every 6 mos. You can cash out anytime after 1yr, but if you cash out before 5yrs, you forfeit 3mos of interest.
✔ You don’t pay taxes on the interest until you cash out. You get the compounding effect tax-free. It’s like a Roth IRA without the age limits and penalties.
✔ When you do cash in, you pay federal income taxes on the interest, but you don’t pay state, county, or city income taxes.
✔ You can avoid taxes on the interest altogether if you use the $$ for qualified higher education expenses.
✔ Key point. You can’t lose the $$ you invest or interest you earn.

The Downside?
✔ The main downside is you can’t buy more than the following annual limits:
❶ You can’t buy more than $10K/yr (*You can buy an add'l $5K/yr, if you use your tax refund)
❷ If married, double the ❶ limits, and
❸ If you own any Corp(s), they can purchase up to $10K/yr.

Inflation and Deflation
✔ I bonds are based on inflation. If inflation drops to 0, cash out. Meanwhile, ride this inflation wave. Your I bond can’t decrease in value. If your $10K bond earned $985 in interest, the new balance is $10,985. Deflation can’t hurt it.
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Here are four general business tax deduction strategies that you can implement before the end of 2020:

1. Prepay your 2021 expenses now to reduce your taxes this year. While it's true you kick the can down the road some, perhaps you have an offset with a big deduction planned for next year. However, even if you don't have such a plan at the moment, you have plenty of time to create one or to put additional big deductions in place for 2021.

2. Stop billing customers. Once again, this kicks the can down the road some and makes your 2021 tax planning more important.

3. Buy office equipment. With 100% bonus depreciation and increased Section 179 expensing in 2020, you can make significant purchases of equipment, machinery, and furniture and write off 100% of the value. Make sure you place the assets in service on or before 12/31, to get the deduction this year.

4. Use your credit cards. Charges to your credit card can create deductions on the day of the charge. This is absolutely true if you are a sole proprietor or if you operate as a corporation and the credit card is in the name of the corporation. But if you operate as a corporation and the credit card is in your personal name, your corporation needs to reimburse you before 12/31 to create the 2020 deduction at the corporate level.

We know that taxes can cause confusion. Please feel free to DM us for more insight into these (or other) year-end strategies.
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When you get busy with your business, it’s easy to forget about your retirement accounts and medical coverages and plans.

But year-end is approaching, and now’s the time to take action.

Here are six strategies you can implement before the end of the year. Five of the strategies increase your tax deductions, and one (the Roth) strategy increases your retirement benefits.

1. Put your retirement plan in place no later than December 31 so you are absolutely sure that you have a plan. In fact, be sure to make a contribution to the plan before December 31.

2. Convert your traditional IRA to a Roth IRA. The long-term savings here can be huge. Make sure to leave the converted funds in the Roth for at least five years.

3. If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2020 deductions, and then put yourself on a monthly reimbursement schedule in 2021.

4. If you have not implemented your qualified small employer HRA (QSEHRA), make sure to get that done properly now. If you have not yet put a QSEHRA in place and you plan to do so on January 1, do that now and just suffer that $50-per-employee penalty should you be found out. Alternately, consider implementing an individual care HRA (ICHRA) in 2021.

5. If you operate your business as an S corporation and you want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance and (b) put it on your W-2. Make sure that the reimbursement happens before December 31 and that you have the reimbursement set up to show on the W-2.

6. Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2020 and, possibly, prior years.

DM us if you need more insights into these (or other) year-end strategies.
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"May your coffee be strong and your Monday be productive.”

Getting ready to participate in a virtual panel discussion about entrepreneurship at the Los Angeles Black Business Expo