Year-end Tax Planning Tips to Put in Place NOW | USTaxAid

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Year-end Tax Planning Tips to Put in Place NOW

Written by Diane Kennedy, CPA on November 27, 2020

We focus on small businesses, their owners and real estate investors at USTaxAid.com. There are year-end tax planning tips for individuals as well, but today were just focusing on businesses and real estate investments.  

The single most important thing you can do right now, before year end, if determine what your tax position is going to be. How much income will you have? What will your deductions be? How much tax have you already paid and how much additional should you have withheld?  

Year-end Tax Strategies 

#1: Start a business.  

If you don’t have a business, start one. It’s the single best thing you can do right now to help your tax situation. But you MUST get it started before year end. That means having a business that is IN business. 
Don’t “get ready” to start. Start.  

Don’t “research” until you’re ready. Start.  

Don’t “think about it”, “plan for it” or write “plans.” Start.  

Actually, do all those things, but don’t let them stop you from starting. NOW.  

#2: Identify expenses that are “ordinary” and “necessary” to the production of income.  

What’s deductible? Just about anything can be, in the right circumstances. 
The key is that they need to be “ordinary” and “necessary” expenses for the type of business you have.  

For example, a CPA practice probably can’t take a deduction for movie tickets but a videographer probably can.  

Instead of looking for what could be deductible, look at your current expenses and ask “How could this be deductible?” 

#3: Pay Your Dependents.  

Since the Trump Tax Plan, which went into effect 1/1/2018, you have lost the ability to take an exemption for your dependents. That means “claiming” your kids on your tax return has no impact.  

Instead, if you have a business, you can pay your dependents for work they legitimately do. There are 3 things I like to have in place before doing this: #1: Have a written job description, #2: Pay a wage that is reasonable for the type of work they do and #3: Have your worker keep a log of hours and days worked.  

Once your dependents (especially in the case of children) have a salary, they can set up pension plans and pick up some of their own expenses. You have effectively moved income from your higher tax bracket to their tax bracket.  

#4: Fund Your Pension.  

If you have earned income, fund your pension. Even if you decide to move some of the tax deferred pension into a tax-free Roth, you need the money in your pension to start the process.  

Fund your pension. If your business doesn’t have a pension set up, get it done right away. Most business pensions require that you set them up before year end.  

#5: Buy a Heavy Vehicle.  

If you buy a vehicle for your business that qualifies as a heavy vehicle (greater than 6,000 GVWR), you can take a 100% write off in the first year. It doesn’t matter if you finance it. You can buy a used vehicle and get the same benefit. You just need to make sure it’s greater than 6,000 GVWR.  

Year-End Tax Strategies for Real Estate Investors 

The above strategies work for real estate investors too, for the most part. However, if you have a loss as a result of the strategies with your passive real estate investments, the amount of the loss you can take immediately may be limited.  

#1:  Put Your Real Estate into Service 

You can’t take any deductions for your real estate until you put it into service. For that reason, it’s better to rent a property out right away and then gradually make repairs and improvements if your plan is to fix it up to sell or increase rental amount.
Otherwise, if you buy a property as a fixer upper and immediately start fixing it up, you can’t take any write-offs until the property is rented.  

#2:  Separate Out Repairs by Invoice 

If you have work done on your property after you have put it in service, the question you’ll need to resolve is whether the cost is an immediately deductible expense or if it’s an expense that you need to capitalize as an asset and depreciate it over time. 
One quick tip is to sort your invoices and separate all invoices that are less than $2,500 from those that are more. 
If they are less than $2,500 you can automatically treat them as repair expenses. However, you may elect to capitalize them and treat them as suspended losses
If you lump them all together in your bookkeeping, you lose that ability to make a choice.  

#3:  Decide if You Are a REP 

A REP (real estate professional) is a designation that allows you to take advantage of the full amount of real estate losses against other income. Otherwise, you’ll have limitations: 

 1.If your adjusted gross income (AGI) is less than $100,000, you can take a deduction of up to $25,000 of real estate losses against other income. That is provided you have sufficient basis and can pass the active participation test.  

2.If your AGI is greater than $150K, you can’t take any real estate loss against other income.  

3.Between $100K and $150K, the amount you can deduct is phased out.  

The exception is if you are a REP. If you are going to claim that you or your spouse (married and filing jointly) need to pass both criteria 

 1.Spend 750 hours or more in real estate activities and more hours in real estate activity than any other activity,  

2.Meet material participation requirements for each of your propertiesunless you make an election to aggregate them.  

#4:  Do You Have Sufficient Basis? 

In order to take any loss (business or real estate, you must have sufficient basis). This is a calculation that is usually performed by your CPA when your tax return is prepared. If you have a question or concern, bring it up with your preparer. You need to be able to prove basis if the IRS or your state taxing authority asks.  

There are two types of basis, equity and debt. The calculations are done based on cumulative totals, so if you someone hasn’t been tracking this, it could take a bit of effort to figure out.  

#5:  Do You Need to Pass Active Participation Test? 

If you have a business or you have passive real estate with less than $100,000 AGI, you’ll need to prove active participation.  

This has been a real IRS audit red flag lately. They want to see proof of active participation. It is a lower standard than material participation, but it still is a critical one that you must meet.  

#6: Is Your Real Estate Investment a Business or Passive Activity? 

If your real estate rents for one week or less, on average, and you provide “substantial” services, you have a business and not a passive activity. 
An example of the difference is an AirBnB (business) versus long-term rental (passive activity).  

#7: Which Bracket AGI Will You Have? 

It’s important to know whether your AGI is under $100K, over $150K or somewhere in between.  

These are just a few of year-end tax strategies. Want more ideas? Check in with coaching.  

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