Year-End Tax Reduction Strategies for Business Owners

By John J. Ceparano, CPA/PFS, CFP®, M.TAX

Wealth Manager, Principal

October 26, 2021

Here we touch on some of the strategies we recommend to our clients. While none of these should come as a surprise, we feel it never hurts to mention them.

1. Fully Fund Your Retirement Plan

It may seem intuitive, but you’d be surprised how many people don’t make sure they’ve put the maximum into their retirement accounts each year. Making a contribution decreases your adjusted gross income. What’s more, the contributions are tax deferred – so you won’t pay any taxes on those contributions until the money in the account is withdrawn. Often, by the time withdrawals are made, you’ll be in a lower tax bracket, so your tax impact could be lower.

2. Add a Cash Balance plan

One strategy we frequently recommend to business owners who make more than $250,000 a year, is to add on a cash balance plan.

Cash balance plans resemble traditional defined benefit plans with a 401(k) twist. As with a traditional pension plan, the participants are promised a certain benefit at retirement. A cash balance plan promises an account balance when you retire at 65, rather than in the form of a monthly annuity payment, like a typical traditional defined benefit plan.

Even though you can contribute at any age, a cash balance plan can be particularly beneficial to older participants. For example, those who are 50 and older can contribute more than $150,000 annually in pretax money. In a 401(k) with a Profit-Sharing feature, total employer and employee contributions for those 50 and older are limited to $58,000. As you can see, with a cash balance plan you can boost your retirement savings dramatically while enjoying a write off.

Selecting the right type of retirement plan for you and your business should be considered with professionals who are well versed in retirement planning, taxes, and tax efficient portfolio designs. Reach out to your Modera adviser if you need support with this.

3. Donate or sell old or obsolete equipment, inventory and furniture

If you have old or unused office equipment or furniture that’s taking up space, and may be even incurring storage fees, you can often get a tax credit by donating it to a 501(c)(3) charitable organization. Donating keeps items out of landfills and can help charitable organizations. There are rules regarding what can be donated and the quantities, so you’ll want to check with your financial or tax adviser for details. For example, in order for obsolete inventory to qualify for a tax credit it must still have some value and the charitable organization must have use for it. If you do make a donation, be sure to get a receipt to submit at tax time that includes the value of the donation, the date the donation was received, and what it will be used for.

Clearing out non-moving inventory can offer additional tax advantages. Let’s say you own a retail store, and have seasonal merchandise left over at the end of Q4. Disposing of that inventory – through a deeply discounted sale perhaps – will allow you to take a loss on your taxes potentially resulting in savings.

4. Clean Up Your Balance Sheet

There can be many benefits to starting a new year with a clean balance sheet, including tax advantages. One of the most important ones is, when you prepare taxes using a clean balance sheet, you’ll have the most up-to-date numbers, which may help you to avoid unwanted attention from the IRS.

If you are on a cash-basis for tax purposes, paying any outstanding bills before year’s end will get them off your books as well as possibly help to reduce your tax burden. Also look at your account receivables, and determine if it’s more advantageous to collect the money in the current year, or push the bill forward into the next tax year. Keep in mind however, that some payers, who could be cleaning up their own balance sheets, may not want you to defer being paid.

At Modera, we work with our clients all year long, to help them stay on top of all of their financial issues and concerns, and to see to it that, when tax time does roll around, there are no surprises. As tax savvy professionals, we offer careful and considerate counsel, and work closely with your other trusted advisers, including CPAs, tax attorneys, and family members to provide complete care for every aspect of your financial life. To learn more how Modera can support your business and/or personal goals, throughout the year please contact us.

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