Near the end of each year, business owners should evaluate the steps that they can take to reduce their tax obligations. One common strategy is to buy equipment for their business before the end of the year so that they can deduct it in that year. In most situations, they will not need to spread the deduction over multiple years in the depreciation process. Certain types of assets, such as passenger cars, are subject to single-year deduction caps, though. You can read more here about Section 179 of the Internal Revenue Code and the first-year bonus depreciation rules, which can help business owners maximize deductions related to personal property. These benefits were expanded under the Tax Cuts and Jobs Act, which took effect in 2018.
Another strategy to consider involves selling off stocks that have fallen in value. If you sell enough stocks before the end of the year to create a loss of at least $3,000, you may be able to deduct $3,000 of your losses from your business income. This rule applies if your total capital losses exceed your total capital gains. Any amount of capital losses greater than $3,000 can be transferred to the next year and deducted then.
Retirement Plans and Health Insurance
As an owner of a small business, you may have access to special types of retirement accounts that offer tax deductions and deferrals. This means that you can claim a deduction when you contribute funds to the account and defer any taxes on money earned by the account until you retire. Perhaps the most common examples of these accounts are 401(k)s and IRAs. The type of plan controls the maximum annual contribution that is allowed, which is defined as a percentage of your net self-employment earnings. The IRS changes these limits each year.
A health savings account can offer a tax-efficient way to pay for your health insurance. You will need to set up the account and contribute to it by December 31 of the current year to claim deductible contributions for that year. Contributions to a health savings account are deductible, and withdrawals are tax-free. You can cover most health care costs that are not covered by your insurance with the money in the health savings account. Read more here about health savings accounts, which must be combined with a high deductible health insurance policy.
Tax deductions apply to charitable donations to an organization that is classified as a 501(c)(3) public charity. This means that it is a religious organization or that it has received a letter from the IRS that recognizes its status. If you donate either money or property to this type of charity, you can deduct the donation if you itemize it carefully. Keeping records is important in case the IRS later investigates the circumstances surrounding a donation.