It may seem premature, but it’s never too early to start tax planning for small businesses. Here are three tax breaks to consider.
1. Claim bonus depreciation or a Section 179 deduction for newly purchased assets
Current tax law allows 100% first-year bonus depreciation for qualified new and used property that’s acquired and placed in service in calendar year 2021. This means your business might be able to write off the entire cost of some or all asset additions on this year’s return. Evaluate your current assets and consider making acquisitions before December 31.
Note: It’s not always wise to claim a 100% bonus depreciation deduction in the first year that qualifying property is placed in service. For example, if you believe tax rates will increase in the future — either due to tax law changes or a change in your income — it might be better to depreciate your 2021 asset acquisitions over time rather than claim bonus depreciation.
A Section 179 deduction is also available for qualifying property placed in service in 2021, up to a maximum deduction of $1.05 million. Recent tax laws have enhanced Section 179 and bonus depreciation, but most businesses benefit more by claiming bonus depreciation. Talk with your tax advisor about which option might be more beneficial for your unique situation.
2. Claim bonus depreciation for a heavy vehicle
The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy SUVs, pickups, and vans used over 50% for business. For federal tax purposes, heavy vehicles are treated as transportation equipment, which qualify for 100% bonus depreciation.
This option is available only when the manufacturer’s loaded gross vehicle weight rating (GVWR) exceeds 6,000 pounds. The GVWR is generally found on the manufacturer’s label, located on the inside edge of the driver’s side door.
Purchasing an eligible vehicle and placing it in service before the end of the year can deliver a big write-off on this year’s return. Read our recent article that delves into tax depreciation for business vehicles.
3. Maximize the QBI deduction for pass-through businesses
For tax years through 2025, a pass-through entity owner can deduct up to 20% of qualified business income (QBI), making this a very valuable tax-saving tool. This deduction is subject to restrictions at higher income levels and is based on the owner’s taxable income.
Pass-through entities are defined (for QBI purposes) as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations. For these taxpayers, the deduction can also be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.
Because of various limitations on the QBI deduction, tax planning moves can unexpectedly increase or decrease it. For example, strategies that reduce this year’s taxable income can have the negative side-effect of reducing your QBI deduction.
These are only a few of the tax breaks your small business may be able to claim. Contact us to help evaluate your planning options and optimize your tax results.