This article gives you 7 tax deduction strategies that you can easily implement before the end of 2020.

Strategy 1

IRS regs contain a safe-harbor rule that allows cash basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance. That means your 2020 prepayments can’t go into 2022.

For a cash-basis taxpayer, qualifying expenses include, among others, lease payments on business vehicles, rent payments on offices and machinery and business and malpractice insurance premiums.

Example: You decide you need $20,000 in deductions. You prepay your $20,000 of your 2021 rent in December of 2020. As a cash basis taxpayer, you deduct the extra rent payment in 2020. Your landlord deducts the rent in the year received.

You may need to prove the rent was paid in 2020 so if you mailed the check in 2020, use one of the postal services tracking delivery methods. The important thing is to be able to prove that the check was mailed in 2020.

Print the delivery and receipt records soon after it is received because it will soon disappear from the postal service records long before you might need it.

Strategy 2 – Stop Billing your Customers, Clients or Patients

Customers, clients, patients and insurance companies generally don’t pay until billed. Hold off on billing in December to ensure that you receive no December income until the following year. Again, this strategy works for cash-based businesses only.

Strategy 3 – Buy Office Equipment

With bonus depreciation now at 100% along with increased limits for Section 179 expenses, buy your equipment and machinery and place it in service before December 31 and get a deduction for 100% of the cost in 2020.

Qualifying bonus depreciation and Section 179 purchases include, among others, new and used personal property such as machinery, equipment, computers, desks, furniture, and chairs (and certain qualifying vehicles).

Strategy 4 – Use Your Credit Cards Correctly

Remember these simple rules.

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit cards for last-minute purchases of office supplies and other business necessities.

If you operate as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies; the date of charge is the date you take the deduction.

But if you operate as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of the reimbursement. Your expense report has to be filed and you have to be reimbursed by midnight on December 31.

Strategy 5 – Don’t Assume You are Taking Too Many Deductions

You should never stop documenting your deductions, and you should always claim your rightful deductions. Even if your deductions are going to result in a loss.

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to this amount, tax law calls this a ‘net operating loss’ or NOL.

NOL’s can turn into cash infusions for your business, as seen below.

Lastly, if you are worried about red flags or audits, don’t. If the deduction is legitimate, and you’re audited and have the records needed, you have nothing to worry about.

Strategy 6 – Thank Covid 19

Two NOL exemptions come from the Coronavirus Aid, Relief and Economic Security (CARES) Act.

  1. The CARES act allows NOLs arising in tax years 2018, 2019 and 2020 to be carried back five years for refunds against prior taxes.
  2. The CARES act allows application of 100 percent of the NOL to the carryback years.

Before the CARES act, you could not carry back your 2018, 2019 and 2020 losses, and your NOL could only offset up to 80% of the taxable income before your Section 199A deduction.

So, if you have an NOL, consider doing the following:

  1. For a 2018 NOL, file amended returns
  2. For a 2019 NOL, for a quick refund, file a tentative refund claim before Dec. 31, 2020 or file an amended return later.
  3. For a 2020 NOL, get your tax info together quickly so you can file early next year – you have to file your tax return before you can claim the NOL.

AFS is a small business tax specialist. Come work with us for business startup coaching, business tax preparation and planning, sales and use tax, entity selection, entity changes, and much more.

Strategy 7 – Deal With Your Qualified Improvement Property (QIP)

QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office, retail space, shopping centers, etc.) if you place the improvement in service after the date you place the building in service.

AFS is a small business tax specialist. Come work with us for business startup coaching, business tax preparation and planning, sales and use tax, entity selection, entity changes, and much more.

Free 30-min consultations for business startups or entity selection questions.