3 Moves Business Owners Can Make Before December 31
Once the year closes, most of your options close with it. Here's what Grant looks at before December 31.
“What can business owners do before the end of the year to lower their taxes?”
The short version
- Entity structure: moving to an S corporation or even a C corporation may be the move, depending on your situation.
- Optimize your W-2 wage as an S corp owner. Solo 401(k)s, SEP IRAs and the QBI deduction all have a component based on your wage.
- Make last-minute investments in your business that can make you more money or save you time. Many are tax-deductible.
The short answer
Here are three moves business owners can make before the end of the year: review your entity structure, optimize your payroll, and make last-minute investments in your business. The last one is my favorite.
1. Review your entity structure
If you're making a lot of money, moving to an S corporation, or even a C corporation, may be the right move depending on your situation. I'm not saying everyone should switch to an S corp. But your entity structure is worth reviewing.
2. Optimize your payroll
If you own an S corp, set your W-2 wage strategically. Solo 401(k) and SEP IRA contributions are partly based on your wage, and so is the QBI deduction.
3. Make last-minute investments in your business
Invest in things that can make your business more money or save you time down the road. Many of these investments are tax-deductible, which lowers your taxable income this year while setting you up to earn more in the future.
Other things worth asking about
Every situation is different, but here's what else I look at.
Business owners: is there anything we can bonus depreciate? Real estate investors: a cost segregation study may make sense.
Compare itemizing to the standard deduction. With the increase up to $40K for state taxes, I expect a lot more people to itemize.
Business owners can also hire their children, depending on their age and the work they do. If you're self-employed, look at a solo 401(k) or SEP IRA, and consider an HSA.
Frequently asked questions
Should I switch to an S corp before year end?
Maybe moving over to an S corporation or even a C corporation, depending on your situation, may be the move to make. There may be some benefit in structuring your entity differently.
How does my S corp salary affect retirement contributions?
A lot of your solo 401(k)s and SEP IRAs are going to have a component that is based off of your wage, along with the QBI deduction.
Are last-minute business purchases tax-deductible?
A lot of times investments into your business that can make you more money or save you time in the future are going to be tax-deductible, reducing your taxable income for the year.