As the year draws to a close, it’s important to take stock of where you can save on tax costs. Making some decisions now instead of waiting until January can make a big impact when April rolls around. Here are 5 end-of-the-year tax strategies to consider discussing with your tax preparer.
1. Use your current losses for credits against previous years.
Because of COVID-19, many businesses suffered significant unexpected losses this year, including construction firms. The passage of the CARES Act brought back a provision that lets you carry back net operating losses from tax years 2018, 2019, and 2020 for refunds against prior taxes.
If you’ve previously been profitable but sustained losses due to shutdowns and plan to take advantage of this provision, be sure to file your taxes early this year.
2. Consider providing bonuses to your employees before the end of the year.
If you struggled to give pay raises this year, a seasonal bonus can be a great way to thank your employees for their hard work and to incentivize them to stay with you.
Bonuses to employees are also tax deductible, so long as you finalize the amount before December 31 and pay them out within two and a half months from that date.
3. Make the Work Opportunity Tax Credit work for you.
If you know you’ll be ramping up work next year, consider doing your hiring before December 31, and target long-term unemployed construction workers (26 weeks or more of unemployment), as well as other specified groups.
The credit expires at the end of the year, so it could be especially beneficial for contractors in milder climates where work may not slow in winter.
4. Strategize on when to purchase supplies and equipment.
For any new business purchases, decide if taking the tax deduction this year would be the most beneficial. This can be for items as small as computers or as large as heavy machinery.
You’re able to write off qualifying capital items immediately rather than depreciating over years, so think about whether now is the time to add to your fleet of vehicles or other equipment.
5. Decide if multi-year contracts for software subscriptions will work in your favor.
If there’s a software you know your company will need for the foreseeable future, you can take the entire annual subscription as an expense write-off when the cash is spent (for cash basis taxpayers).
You might event want to consider committing to a multi-year agreement, in which case the extra cash going out the door means less taxable income for you this tax year. This applies to existing subscriptions as well – you can ask your solution provider to add another year or two to your subscription to save on your tax bill.
As with any financial considerations, consult with your tax professional to make choices that will be the most optimal for your business. They will certainly have additional tips that you can put into place both for this year’s taxes as well as going into next year so you can retain as much of your profits as possible.
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