Tax Power Plays for the End of the Year

December 16, 2020

Tax season is just around the corner and there’s little time left to make moves that will mitigate your tax bill for 2020. I recently sat down with a good friend of mine to discuss these end of the year tax power plays. Chris Mahan, owner of Mahan & Associates is a wizard when it comes to breaking down and taking advantage of the Internal Revenue Code (IRC). That’s why I thought of him when I began researching this subject. So, join me as I breakdown what I learned from Chris!

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TIME INDEX:

00:52 – Year-End Tax Power Plays
02:55 – Why This Year is Different
04:56 – What We Can Do
09:23 – Other Strategies
13:07 – Advance Expenses
17:23 – Summary

End of the Year Tax Power Plays

Chris’ company, Mahan & Associates, works with entrepreneurial doctors around the country, enabling them to minimize their taxes to build their wealth. That’s what they do in normal years. But 2020 has been anything but normal. In fact, there are many things that have taken place this year that could greatly impact your taxes. We’ve had the PPP, Main Street Lending, and many other specialized loans and grant programs because of COVID-19.

All of these things will affect your federal and state income taxes. Therefore, even if you’ve never used a tax professional in the past, I really think that this year, it is a good idea to consult one. But why is this year so different and what can you do to prepare for tax season?

What Makes This Year Different?

The short answer to why 2020 is different is the COVID-19 pandemic. As a result of this disease, many businesses were forced to shut down for extended periods of time, resulting in a loss of income. In order to sustain businesses during these mandatory closures, the government created the PPP loan. Even though it is said to be non-taxable we must consider the guidelines surrounding the use of PPP funds.

Even though the loan itself isn’t subject to taxation, there is a side effect to using it. PPP funds were to be used on expenses that aren’t tax-deductible (although, at the time of this writing there is a bill in Congress that could alter the deductibility of PPP). As a result, many business owners are losing massive tax deductions that they ordinarily would be able to claim, ultimately, inflating their tax bill. Without proper tax planning and the guidance of someone that truly understands the IRC, many business owners could find themselves in a world of hurt come April 15, 2021. Not only will they have lost massive revenues in 2020, but they will then be hit with a much larger than usual tax liability on tax day.

What Can We Do About It?

With all that’s happened in 2020, it’s easy to have a negative outlook on things. But that’s not who we are, as entrepreneurs. We have a dogged determination to overcome insurmountable odds and a hope that keeps us moving even when things seem hopeless. That’s why I reached out to Chris. For one, he has an incredible understanding of the IRC. Second, as a business owner, he understands what everyone is going through right now. So, when I asked him if there was anything that could be done in light of all of this year’s weirdness, Chris responded with a practical message.

We have to stick to the basics in some regards. Chris stressed the importance of accurately maximizing your home office deductions. The IRC allows you to deduct some of your expenses, including WiFi, rent/mortgage, and utilities for a home office. However, there are restrictions and you will need to ensure that you are following their guidelines in order to stay within the confines of the law. Additionally, there are strategies to ensure that you get the most out of your automobile deductions. Unfortunately, these are low-hanging fruits that many just aren’t aware of.

For example, many of Chris’ clients will use their home office to check their emails and their daily schedule before driving to their practice. Likewise, they return to their home office at the end of the day and finalize any reports that they need to get done and return phone calls to patients. In doing so, they have just logged miles and wear and tear to their vehicles as a business expense. Setting up a home office and properly tracking it could create major deductions for it and your vehicles. But what about some of the deeper and more complex strategies?

Other Important End of the Year Tax Strategies

An often-overlooked tax power play is utilizing qualified retirement plans to reduce taxable income. Chris and I have each seen clients save tens of thousands of tax dollars by using the right type of retirement plans. By employing the right (for your situation) 401(k) and defined-benefit plans, you could potentially save thousands of dollars on your tax bill while also improving your position for your retirement.

Likewise, qualified improvement property has become a great tool for saving tax dollars. There are several tax strategies that can be used with qualified improvement property. If you booked QIP on your 2018 or 2019 tax returns, you can now go back and accelerate that depreciation to get a huge deduction. You’re able to amend prior year’s returns, so if you need cash now and you did a lease/hold improvements, build-out, or a new building there are strategies that can enable you to receive large checks from the IRS.

How to Use Advance Expenses to Lower Taxable Income

One of the most basic ways of lowering your taxable income is to spend money on deductible expenses. I think we all know that. But what about advance expenses? This is a strategy that involves paying your future expenses in advance. Thus, accelerating the deduction. The downside to this strategy is that you’re taking future deductions away from yourself. However, in some situations, this may be advantageous.

As of right now, you can pay up to 12 months of rent by December 31, 2020, to receive the deductions on this tax cycle. With COVID and the PPP, this is a strategy that could help a lot of business owners to decrease their tax burden for 2020. In addition to this, Chris pointed out another wrinkle that could make things a little more interesting.

PPP Forgiveness as a Tax Strategy

The vast amount of PPP loans have yet to begin the forgiveness process. They are awaiting further clarification from the SBA before entering the forgiveness phase. However, as business owners, if you opted for the 24-week PPP loan, you have to apply for forgiveness on December 31, 2020, or after.

What that means is that right now, it is simply a loan. As far as the IRS is concerned, the timing of the forgiveness is non-consequential if there is a reasonable expectation that the loan will be forgiven. Therefore, if you apply for forgiveness in January, the funds, in their current state as of the writing of this blog, will be a tax problem for 2020’s filing. Again, there is currently, at the time of this writing, a bill that could change the very text I just wrote.

Assuming that the election results hold up, the effective tax rate for high-earning business owners could be higher in 2021. However, understanding that ahead of time will allow you to plan for it. So, speak with your tax planner about your individual circumstance.

In Conclusion…

Folks, this has been a crazy year and it promises to bring some crazy tax situations, and it appears we will have even more changes in the coming 15 days remaining in 2020. I can’t think of a better year to have a forward-thinking tax professional to help reduce your taxes than this one. Your tax preparer should be your tax strategist. They’re coming up with the tax power plays that save you money. The more money you save, the more wealth that can be built.

Friends, 2020 has been hard. It has. It’s been a rough year, but life is still good. Taxes can be frustrating. But with the right tax professional and a solid strategy making tax power plays can at least be financially simple!

Special Note: I am not a tax advisor, but Chris is and this is why we invited him to speak to tax power plays. Please listen to the full podcast as this post is not tax advice.

If you have questions concerning your personal financial circumstances, reach out to us. The Financially Simple team is always here to help.