On January 1, 2021 the minimum wage in Illinois will increase to $11.00 an hour for employees and $6.00 an hour for tipped employees.
We will see what the effects of the increased minimum wage has with the now shaky Illinois economy.
The experts say that an increased minimum wage will reduce employment in the long run, and less employment opportunities for low-skilled workers.
How are you going to handle your increased labor costs? I don’t see any other option but to consider yet again a price increase and considering limiting your employees hours.
Don’t forget we will be calling you asking about your health insurance premiums this month.
We know your thoughts are on the holiday and not tax savings ... but taking actions in the next few weeks specifically designed to reduce your 2020 tax liability will prove to be rewarding when you file your taxes next year.
Earlier this month I attended two days of virtual tax school. Taught by a former IRS agent, Chris Bird, Chris teaches from a much different approach than the virtual IRS Nationwide Tax Forum I attended for four weeks this summer. Chris looks at everything from the practitioner perspective, not from a we make the rules perspective. Specifically how we can help you save taxes.
However, a reality check is in order. There really isn’t anything new in our imaginary tax world this year, with the exception of Covid-19 relief legislation. New rules apply to foreclosures, and repossessions, cancellation-of debt income, and 2020 relief loans and grants such as the PPP loan you may have gotten earlier this year. By the way PPP loan forgiveness is not taxable income to you. I can assure you that the Covid-19 is an extraordinary taxpayer friendly legislation and hopefully produces even bigger refunds for 2021.
With just 31 days left in the year, now is the time to focus on some last minute tips to help you have a happier April 15th. Tis the season for tax planning and more importantly tax savings.
Whether you are filing your tax return as a partnership, corporation, or a sole proprietor, there are certain things you should be doing right now to save taxes. We hate April 15th surprises just as much as you do. Please understand that the things you do right now can make all the differences come next April.
But first a quiz. What deduction is absolutely free? Is only available if you are a small business owner or own rental property. And likely won’t survive a change in administrations. If you answered QBI, you would be correct. The Qualified Business Income (QBI) deduction is something that we have never seen in more than 40 years of tax practice. It has an extraordinary effect on your tax liability.
Why? Because the QBI deduction reduces the net income of your small business by 20 percent. That means you will pay taxes on 80 percent of business’ net income this year. The IRS has introduced a new form 8995. It is attached to your personal tax return, calculating how we made the QBI deduction.
It does require some work. Specifically looking at how to maximize this free deduction, and calculate the lowest tax liability, while preserving current and future tax deductions. Is it better to make an IRA deduction, or expense the purchase of new equipment? Does the QBI deduction outweigh the benefits of let’s say a SEP contribution? These decisions can only be made when we prepare your tax return. It is that complicated calculation. But it is a really good thing. Trust me.
Version 37 of the same story.
Sally Smith, was a smart businessperson, she knew the basics of year-end tax planning.
1. Postpone income to next year.
2. Pay as many expenses as possible this year.
3. Keep inventory level low.
4. If you are going to make a capital investment, do so before the end of the year.
5. Double check for missing deductions.
6. Invest in an IRA or a similar type account.
Sally owns a retail store and faced the year end with her eyes wide open. Sally knew that a few strategies would pay big dividends on April 15th. Here is what she did to reduce her tax liability:
Since Sally was operating her business on a cash basis and relied upon cash sales through her cash register, she did not have the opportunity to postpone much income. She followed a policy based on our firm’s standard practice for clients for many years, to close her books on December 28th, which gave her an opportunity to defer three days of sales to next year.
Sally then reviewed her bills. She started to write out checks for her expenses. She wrote checks for all expenses due, even if some expenses were due in January. She dated her checks for December 28, 2020 to be sure that the expenses were recorded for this year on December's bookkeeping. Her checks written totaled to almost $10,000. Her one simple strategy, accelerating expenses meant that Sally saved over $4,000 in income tax this year.
Since you pay taxes on your inventory at the end of the year, Sally knew that reducing her inventory to the lowest amount possible was important for her. First, she decided to review her inventory to see if she had things that have been gathering dust. She found items that in fact had been sitting around for more than three years. She decided to mark those items down and immediately started an inventory reduction sale for those items. She knew that the value of her inventory was based upon her costs of the items, not the selling price. She also knew that items that were partially used, or supplies not for resale, did not count as part of her inventory.
Sally had been debating whether to purchase a new computer for her business. The local computer store was offering a "six-months same as cash" financing offer for the purchase of new computers. Sally decided to purchase the computer now, electing to take advantage of the special financing offer. She knew that she could deduct the full purchase price of the computer on her tax return, even though she did not pay for it right away. When you purchase something using a credit card or borrow the money, as Sally did, you get to deduct the amount when you purchase the item. The $3,000 computer saved Sally $1,200 in income tax.
As part of her year-end review Sally took a minute to see if perhaps she has recorded all her business expenses as part of her monthly record keeping. She knew that the credit card that she had been using exclusively for business had some interest payments that were not included.
She made a note to record her year-end statement from her credit card company to make sure that it was included as interest paid on her year-end documents to her accountant. In addition, she decided to review her automobile mileage and other receipts for expenses that she might not have had for her business and had a chance to record in her monthly record keeping.
Surprisingly, Sally read a previous newsletter and decided to take her business accounting online. She took our advice and subscribed to Wave app accounting. She took advantage of downloading her bank account and discovered how easy it was to enter her data. She really liked it and is recommending it to other small business owners she knows.
Sally also knew that she had time to make her annual IRA contribution until April 15 of next year. She decided not to make it till next April. She also made a note to talk to us about Roth IRA accounts and analyze the different options available to her. One of her options was a self-employed Pension Plan commonly called a SEP. IRA's. SEP. IRA's do not have to be opened or funded until the due date of your return. That means that Sally doesn't have to open or make a contribution to a SEP IRA for the 2020 tax year until April 15, 2021. She can also contribute a larger amount to her SEP IRA than she could to her regular IRA. However, she was reluctant to open one because she also knew that she would have to contribute an amount to her full time employees.
She made a note to ask her tax guy what that contribution would be and what her resultant tax savings would equal. She also thought her accountant might have ideas on how to "cushion" the employee's contribution issue.Sally knew that her year end review of her tax situation saved her almost $7,000 this year.
She made a note to review her year end information before we prepared her tax return in 2021.
SAVE TAXES...REMEMBER BEFORE JANUARY 1, 2021
Postpone income to next year.
Pay as many expenses as possible this year, even if you do not send the checks off till January, be sure to write the checks for the expenses.
Keep inventory at a low level.
If you are going to make a capital investment, do so before the end of the year.
Double check for missing deductions.
Invest in an IRA or similar type account.
Here is our list of last minute individual tax strategies for 2020:
1. Increase your contributions to your 401(k) or IRA retirement investment plans. A retirement plan is an easy deduction. If your employer is not participating in your retirement plan, you should consider an IRA or participate in the self funded 401(k) if at all possible. Also, while some employers require a wait time or require employees to wait until open enrollment to start up payroll deductions, some companies will let you start at the end of the year or even on the next paycheck. It’s worth looking into, since the money contributed to a retirement account is typically not subjected to income taxes.
2. Charitable giving. Not only are donations good for your taxes, they're good for society as a whole. While there may be no large tax benefit for some donations, please consider the social benefits to making donations to charitable organizations.
Even older computers and cell phones can be useful for training or other charitable causes -- it doesn't have to be an iPad. You're entitled to fair market value for clothes and furniture, among other things, so take time right after Christmas to clean your closets and head to your favorite charity.
The little things add up too, and you can write off out-of-pocket costs incurred while doing good works. For example, ingredients for casseroles you prepare for a nonprofit organization’s soup kitchen and stamps you buy for your school’s fundraising mailing count as a charitable contribution. You can also deduct any out-of-pocket travel expenses for charitable causes, which includes everything from mileage for travel, taxis or parking expenses.
3. Choose stock donations over cash. If you're thinking about making a large cash donation, you might want to think about using stock in a company that has done well. Make a donation of those shares; if you sell the shares to make a large donation you have to pay taxes on the profit. However, if you donate the shares then you receive a tax deduction for the fair market value of the stock.
4. Paying next semester’s college costs early and counting the costs toward the American Opportunity tax credit. Simple and easy. Works best for freshmen who started college in the fall of 2019.
5. Sell losing investments. Capital losses are first used to offset capital gains, and then up to $3,000 of the net loss can be deducted against income, such as your salary. Any excess loss is carried forward to future years.
8. See if you can deduct any medical costs. You have to itemize to qualify for this deduction and expenses have to be more than 7.5% of your adjusted gross income, but if you have a lot of doctors' visits and medical procedures, it may be worth checking out. Will you need surgery in the near future? If so, try to get it in before the end of the year.
I hope this helps your planning!
