We recently received information from the Bradford Tax Institute, from which we receive tax articles on a regular basis. We thought this information would be beneficial for those who read our newsletter.
This information gives 7 ideas of how to save money at year end that your business does not have to declare as profit or as taxable income.
We will send two ideas a week for the next 4 weeks. Here is the first Installment.
1. Prepay Expenses Using the IRS Safe Harbor
You just have to thank the IRS for its tax-deduction safe harbors.
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2020 prepayments cannot go into 2022. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Thursday, December 31, 2020, you mail a rent check for $36,000 to cover all of your 2021 rent. Your landlord does not receive the payment in the mail until Tuesday, January 5, 2021. Here are the results:
- You deduct $36,000 in 2020 (the year you paid the money).
- The landlord reports taxable income of $36,000 in 2021 (the year he received the money).
You get what you want — the deduction this year.
The landlord gets what he wants — next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2020, he would have had to pay taxes on the rent money in tax year 2020.
2. Stop Billing Customers, Clients, and Patients
Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2020. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)
Customers, clients, patients, and insurance companies generally donâ€™t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.
Example. Jim Schafback, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2020 income by moving that income to 2021.
Own Nothing; Control Everything!