Six Year-End Business Income Tax Deductions To Keep In Mind All Year

Taruna Kanani, the President and Founder of KB Tax Deviser CPAs specializes in creating customized tax strategies for small business owners.

Even in a new year, understanding six powerful business tax deduction strategies can help you make the most of your claims before the calendar reaches December 31.

1. More Deduction Than Income?

At the end of the year, you may have a business expense deduction higher than business income resulting in tax loss — also known as a net operating loss (NOL). As long as you document the deductions and claim eligible deductions, you can benefit from this tax loss as it creates tax benefits for you in the future. This is true especially if you are in the startup phase or growth phase or the Covid-19 pandemic affected your business. This is particularly even more beneficial if you have income from other sources as you can utilize this NOL to offset income from other sources.

2. Put Billing On Hold

This, in fact, is one time-tested rock-solid strategy to lower the taxable income in the current year. You can put the client billing on hold until Dec. 31, 2022 (especially if you file taxes on a cash basis). The clients/customers don’t pay until they receive the bills.

Example: A business coach, usually bills his clients at the end of each week but can skip billing for the month of December and instead sends the bills in the first week of January. Vola! He postponed paying taxes on December 2022 income by moving it to January 2023.

3. Prepay Expense

The IRS has created a rule that allows you to prepay your expenses up until 12 months in advance without being challenged by them. This is because it’s considered deductible and thus allowed under their safe harbor rules for tax deductions.

Example: Let’s assume, the monthly rent is $2000 and you would like to deduct $24,000 in rent deduction this year. You can mail a check for the rent of $24,000 on December 31, 2022, to cover the rent for the entire year of 2023. The landlord will receive this payment in 2023. Many times when you make the payment in advance, you qualify to receive an additional discount, an added benefit. Here’s how it works:

  • You deduct $24,000 in 2022 since you made payment in 2022.
  • The landlord will report $24,000 as rental income in 2023.

4Purchase Equipment

Buy equipment or machinery or vehicle and place it in service before December 31, 2022, and qualify for 100% bonus depreciation or depreciation under section 179 for the purchase in the 2022 tax year.

5. Timing A Purchase Using Credit Cards

Usually, the day you charge your credit card to make the qualified purchase is the day you can write off as business expenses. This gives an opportunity for the last-minute purchase of office supplies and other business necessities.

6. Qualified Improvement Property

Qualified improvement property (QIP) is any improvements to interior portions of non-residential buildings you own if placed in service after the date this building was placed in service initially. The non-residential building includes office buildings, retail stores or shopping centers. Prior to the Tax Cuts and Jobs Acts, QIP was subject to depreciate over 39 years just like real property. However, it’s not considered as real property but is instead considered as 15-year property. This means you can benefit from 100% bonus depreciation or expense it under section 179 for immediate write-offs. To get the write-offs for QIP, you must place QIP in service on or before the end of the tax year, December 31.

The number one thing you should do to save money on taxes is to claim all of your business deductions sooner rather than later. The more you can claim as a deduction from your taxable income — be it for purchase or overhead costs like rent — the less money flows into regular tax brackets where higher rates apply.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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