Year-end tax strategies should be planned for now
Most companies have a rhythm to their tax planning that often involves making key projections and determinations just prior to the end of their calendar or fiscal year.
With supply chain and labor shortages due to the pandemic, as well as new legislation on the books, waiting until just before your year end for year-end tax planning this year could significantly limit your options.
It may still only be September, but pretend it’s just before your year end and get started now. Here’s how.
More money, more problems
If your business is profitable, you may be considering offsetting those profits by investing in new equipment or vehicles through the use of the Section 179 depreciation deduction (the expensing election) or bonus depreciation.
Thriving businesses should start keeping an eye out for any year-end purchases leveraged for cutting year-end tax bills.
In the past, most small businesses would do a substantial amount of their tax planning in the last month of the year based on the profitability of the current year. Strategies include delaying customer billing, paying all outstanding accounts and a variety of other tax-saving approaches.
This year, with the disruption in the supply chain of most capital investment purchases, the time is now to start your year-end tax planning. Supply chain issues may severely affect your lead time to obtain those needed asset purchases.
The ripple effect of the microchip shortage has been felt by manufacturers that produce everything from smartphones to vehicles to wind turbines. Don’t expect to stroll into the local auto dealer in December and have a new work truck waiting for you with a pretty red bow on it.
Certain machines that are crucial to manufacturers are already on backorder until 2022. Prices are going up, and that trajectory is expected to continue.
Contact your vendors for pricing verification and potential delivery dates for large equipment and vehicle purchases.
Things to do
Make sure your accounting records are balanced and up to date as of the end of August.
Prepare a quick projection of your expected results from September through December. Be sure to use the current year’s trends (upward or downward) as some earlier budgets have been drastically underestimating the impact of the current business climate.
Prepare a list of potential capital expenditures you plan to make during the next 12 months. Be sure to prioritize the items you will need before the items you want, and assign estimated prices.
List any large supply purchases you will need in anticipation of 2022 business you may have on the books already.
Things to remember
If you incurred losses in the previous business year, there is a limitation on net operating losses to offset future profits, both federally and for most states.
Another thing to consider is if your business utilized the Paycheck Protection Program with the funds being forgiven, or partially forgiven, and how that affects your bottom line. Federally it is nontaxable, but in some states these funds are taxable.
You might also qualify for the Employee Retention Credit. These funds obtained from the federal government through payroll tax filings are also a taxable source of funds.
Good help is hard to find
A common complaint across the landscape these days is how difficult it is to find qualified, motivated workers. The pandemic was the catalyst for numerous retirements, but it also caused many employees who are not close to retirement age to move on from their jobs in search of something else.
Combine that with rising costs and rising wages, an increase in government assistance and a shortage of help, and hiring may prove to be harder than ever.
If you’re short-handed right now — and many are — that can alter your projections and may end up leaving you with more tax liability than expected.
With so many unusual factors out of your control this year, plan ahead for your year end, don’t wait.
Ralph Formica and William Slattery are CPAs in the tax services practice at Connecticut accounting and advisory firm FML.
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