Planning to help lower your business’ taxes for 2021 and 2022 is more challenging than usual. Uncertainty surrounding pending legislation that could increase corporate tax rates and also the top rates on both business owners’ ordinary income and capital gains (starting next year) requires diligence as we monitor Congressional action.

Whether or not tax increases become effective, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value.

However, if proposed tax increases do pass, the highest income businesses and owners may find that the opposite strategies produce better results: Pulling income into 2021 to be taxed at currently lower rates, and deferring deductible expenses until 2022, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.

Mierendorf & Co staff are reviewing strategies to best advise you on possible actions before year-end to help you save tax dollars. We can narrow down specific actions when we discuss a particular plan for your business. In the meantime, here are some actions before the end of the year to consider, if applicable. Contact us for advice if these or other tax-saving moves might be beneficial.

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. Taxpayers may be able to salvage some or all of this deduction by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for 2021. The rules are quite complex, so don’t make a move in this area without consulting us.

More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings until next year, or by accelerating expenses (e.g. paying bills early or by making certain prepayments).

Businesses should consider making expenditures that qualify for the liberalized business property expensing option. Expensing is generally available for most depreciable property and also available for interior improvements to a building (but not for its enlargement, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.

Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the expensing deduction.

A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2021 (and substantial net income in 2022) may find it worthwhile to accelerate just enough of its 2022 income (or to defer just enough of its 2021 deductions) to create a small amount of net income for 2021.

Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers.

To reduce 2021 taxable income, consider deferring a debt-cancellation event until 2022.