James Zahansky, AWMA®
Principal/Managing Partner, Investment Advisor & Chief Goals Strategist
If you’ve gotten an unpleasant surprise while preparing your business taxes, don’t panic. Here are five things you can still do now to try and reduce what you owe before you file...
1. Contribute to a Retirement Account
Just like a retirement plan at a regular job, contributing to a small business retirement account can help lower your tax bill. After the calendar year has ended and before your tax filing deadline, you have two options.
One is to contribute to a Traditional IRA and the other is to contribute to a SEP IRA. Both provide a deduction against your taxable income to reduce income taxes.With a Traditional IRA, you are allowed to contribute up to $6,000 per year, while a SEP IRA allows you to contribute up to 20 percent of your business profits. In both situations, your deduction is typically equal to your contribution.
2. Make Sure to Take the Qualified Business Income Deduction If You're Eligible
The Qualified Business Income Deduction is worth up to 20 percent of your business profits. Unlike other deductions, you don't need to spend anything or otherwise qualify. The point of this deduction is to match the tax cut that businesses organized as corporations receive.
However, there are limits on who can claim it. If your total taxable income (including your business income as well as other income) is at or below $164,900 for single filers or $329,800 for joint filers, you may qualify for the 20% deduction on your taxable business income in 2021. If your income is above these limits there are additional restrictions on eligibility and you may not be able to receive the full 20% deduction. You should talk with your tax professional to see where you stand.
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3. Check for Missed Expenses
It's important to go back through your records and make sure you didn't miss any business expenses. This might include things like travel expenses that got mixed in with your personal vacation budget. If an expense was an ordinary business expense and necessary to conduct your business, this is a cost that can generally be deducted.
Don't skip expenses because you're afraid of an audit, either. If you do get audited the IRS will simply ask for your receipts and documentation showing that the expense was for your business. As long as you kept the appropriate records during the year, you should have nothing to worry about.
4. Request a Payment Plan
If you are out of options to reduce your tax bill but still can't pay it, request a payment plan. The IRS offers installment agreements to let you pay off your tax bill at a relatively low interest rate. You will have to pay interest and late payment penalties, but they're not as expensive as the penalties you’d incur for not making any payment at all. An added benefit is that there is no credit application or credit reporting.
Before you request an installment agreement, you may want to double check that you can't get a cheaper loan or take advantage of a credit card promotional rate. These will affect your credit, but the cost could be lower.
5. Plan for Next Year
Once you’ve done all you can to lower your tax bill for this year, don’t stop there. Avoid more unpleasant surprises next year and in the future by creating a holistic financial strategy that will best serve both your business and your personal finances (and not just at tax time).
At Weiss, Hale and Zahansky, we guide business owners through our strategic Plan Well, Invest Well, Live Well process to help make their businesses thrive and their personal financial and life goals a reality. To see how we can partner to benefit you and your business, contact us now to set up a time that’s convenient for you to connect in person, by phone or by video conference.
Presented by Principal/Managing Partner James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.