The end of the year is an important time for your business, and not just because it’s such a busy sales season. As the year ends for your small business, the financial year ends as well, and that means it’s your last chance to affect your tax situation. You’ve still got months to file your federal tax return, but now’s the time to think ahead. As the new year approaches, you should be considering your tax status for the year and preparing for how this tax year will show up on your return.
There’s still time to maximize your tax deductions and improve your eventual after-tax income amount. Set yourself up for a better new year with these end-of-year accounting tips.
What Deductions to Claim
Tax deductions allow you to reduce your taxable income and reduce your tax burden. There are certain types of necessary business expenses that you can report in order to claim deductions. Because these expenses are important for your business, the money you spent is no longer considered part of your income.
If you really want to maximize your deductions and maximize the income you get to keep for your business, you’re going to need effective record-keeping as well. You can’t claim deductions for expenses you don’t remember or don’t have records for.
No matter what records you have for the past year, however, you can still take advantage of these deductions before the year ends.
Max Out Retirement and HSA Savings
Contributions to many retirement savings accounts and HSAs can be deducted from your income on your tax return. If you have the money available, take advantage of this opportunity to reduce your taxable income, and save for the future!
Each year the IRS sets a contribution limit for your 401(k) and other accounts. If you want to make the maximum contributions possible, make sure to do it before the end of the year.
Make Charitable Contributions
If you’re going to claim a deduction for donations you make to eligible charities, you need to be sure to make those contributions before the end of 2020 as well.
Charitable contribution deductions are only usable if you’re not claiming the standard deduction. To make it worth itemizing these deductions, your contributions need to be significant. And there is a lot of potential if you take advantage of it. Individuals can deduct qualified contributions up to 100 percent of their adjusted gross income.
Schedule Expenses and Defer Revenue
As you prepare for the final days of your financial year, you might want to look over your records and estimate what your income will look like on your tax return. If you’re on the edge of a tax bracket, you might want to take action and ensure you don’t overflow into the next one.
If you’ve been planning big business expenses already, you can rush to schedule them before the year-end if you want to claim them on your tax return. If you have accounts receivable where you can adjust the timing, you could also postpone receiving those payments until after the new year. These inflows and outflows of money will make it onto your tax return one way or the other. The question is whether it will be this year’s return or next year’s. Plan carefully and choose the route that’s best for your company.
Sell Off Bad Investments
If you’ve made investments that have lost money, the end of the year is an ideal time to let them go. Once you’ve sold the stocks off, the capital loss deduction allows you to deduct from your income the money you lost in that purchase.
This capital loss can offset any capital gains income you’ve received, or you can claim up to $3,000 of it to deduct from any other income. Any capital loss you can’t claim this year can carry over to the next year’s tax return.
Get Advice from a Professional
Tax law is complicated, and it’s something every individual and business has to struggle with. Find a tax accounting professional to help you prepare your tax return. An expert can make sure you claim every deduction available and improve your process for the future.