Editorial · December 13, 2020
Year-End Tax Planning: A Checklist for Small Business
Year-end tax planning means making a few money choices before December 31 so they count in the 2020 tax year. This checklist is for small business owners. It covers what the IRS says about timing, equipment, payroll and estimated tax. It is general information, not tax advice, so confirm each step with a tax professional.
1. Know which method counts your costs
The date on a payment can matter as much as the amount. Under the cash method, you generally deduct business expenses in the tax year you pay them. Under the accrual method, you generally deduct an expense when it is owed and its amount can be figured, even if you pay later.
So the first step is simple. Check which method your business uses. A cash-method owner who pays a supplier on December 30 usually counts that cost in 2020. If the payment waits until January 4, it usually counts in the next tax year. Ask your preparer before you move any payment, because some costs must be spread over several years.
2. Review equipment you plan to buy
Many owners think about equipment in December. The tax code lets a business deduct the cost of qualifying equipment in one year under Section 179, rather than a little each year. For tax years starting in 2020, the IRS set the limit at $1,040,000. The limit starts to shrink once a business places more than $2,590,000 of qualifying property in service during the year. For an SUV, the amount that counts under Section 179 is capped at $25,900.
Most small businesses spend far less than these caps. The more common limit is the business's own taxable income, so ask your preparer how that rule applies to you.
There is also a special depreciation allowance. For qualified property acquired and placed in service after September 27, 2017, the IRS describes a 100 percent allowance. Both rules depend on one more fact, covered next.
3. Place equipment in service by December 31
Buying is not enough. The IRS says you place property in service when it is ready and available for a specific use. A machine that is delivered but not yet set up may not count for 2020.
Here is the plan. Order early. Ask the seller for delivery and setup dates in writing. Keep the invoice, the delivery record and a note of the day the item was first ready to use. If a vendor warns of a delay, talk to your preparer before you count on a 2020 deduction.
4. Check payroll and benefits timing
If you have employees, December has its own list. The IRS Employer's Tax Guide says benefits provided in a calendar year must be treated as paid by December 31 of that year. It also reminds employers to deposit withheld income tax and both halves of Social Security and Medicare tax on schedule, and to furnish each employee a Form W-2.
Use December to match your payroll records to your bank records. Confirm each worker's name and Social Security number. A small error now is easier to fix than a notice later. Look at any bonus you plan to pay, and ask when it will count as paid.
5. Make sure estimated tax is on track
Sole owners, partners and S corporation shareholders usually pay tax during the year through estimated payments, using Form 1040-ES. Corporations use Form 1120-W. The IRS says most people avoid the underpayment penalty if they owe less than $1,000 after withholding and credits. They also avoid it if they paid at least 90 percent of this year's tax or 100 percent of last year's tax, whichever is smaller.
In December, compare what you have paid with what you expect to owe. If a gap is clear, ask your preparer whether another payment makes sense. Do not guess, because 2020 income may look very different from 2019 for many businesses.
6. A short list to finish the year
- Confirm your accounting method.
- List equipment bought this year and the date each item was ready to use.
- Decide which payments should be made before December 31 and which can wait.
- Match payroll, benefit and deposit records.
- Compare estimated tax paid with the amount you expect to owe.
- Book a call with your tax professional before the year closes.
Rules change, and Congress can act late in a year. Check the IRS pages above for updates before you act, and keep every receipt and record.