Table of Contents
1. IRA Funding Trick
If you don’t have enough cash to make a deductible contribution to your IRA by April 15th, here is how you can still take the tax deduction for that tax year. To get started, all you need is an existing IRA.
Begin by having $6,000 distributed to you from your IRA. Once you have the $6,000, immediately deposit it back into your IRA. If you do this before April 15th, this counts as your deductible contribution for the year. The best part of this is that you have 60 days to “make up” the $6,000 withdrawal (and avoid penalties and taxes). To do this, simply deposit a $6,000 “rollback” into the same IRA account within 60 days and you will be able to avoid taxes and penalties on the original $6,000 distribution made to you.
This is a type of short-term loan from your IRA to make this year’s deductible contribution before the April 15th due date; however, you can only do this once in a 12-month period. If you don’t replace the money within 60 days, you may owe income tax and a 10 percent withdrawal penalty if you’re under the age of 59 1/2.
A 2014 Tax Court opinion, Bobrow v. Commissioner, T.C. Memo. 2014-21 held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period. The IRS issued a revised regulation regarding this decision, which became effective on January 1, 2015.
The ability of an IRA owner to transfer funds from one IRA trustee directly to another is not affected because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation.
2. Determine the “Best” Retirement Plan Option
As a self-employed small business owner, there are several retirement plan options available to you, but understanding which option is most advantageous to you can be confusing. The “best” option for you may depend on whether you have employees and how much you want to save each year.
There are four basic types of plans:
- Traditional and Roth IRAS
- Simplified Employee Pension (SEP) Plan and Savings Incentive Match Plan for Employees (SIMPLE)
- Self-employed 401(k)
- Qualified and Defined Benefit Plans
To make sure you are getting the most out of your financial future, contact the office to determine your eligibility and to figure out which plan is best for your tax situation.
3. Make Your Landlord Pay for Improvements
Instead of paying for leasehold improvements at your place of business, you can ask your landlord to pay for them. In return, you offer to pay your landlord more in rent over the term of the lease. By financing your leasehold improvements this way, both you and your landlord can save money on taxes.
Under the Tax Cuts and Jobs Act of 2017 (i.e., tax reform), qualified leasehold improvement was superseded by qualified improvement property (QIP). Ordinarily, you must deduct the cost of qualified improvements made to your place of business over a 39-year period (similar to that of depreciating real estate); however, up to $1,000,000 in qualified leasehold (as well as restaurant and retail) improvements can be expensed using the Section 179 deduction (subject to certain rules), thanks to tax reform legislation passed in late 2017. Improvements must be interior, that is, roof HVAC systems, façade work and other exterior improvements such as on the roof do not qualify.
Per the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Qualified Improvements to Property placed in service after 2017 are allowed over a 15-year period (vs. 39 years). In most cases, post-2017 QIP retroactively qualifies for the bonus depreciation deduction as well.
The PATH Act changed the definition of qualified property from qualified leasehold improvements to qualified improvement property. The rules regarding qualified improvement property differ from those for qualified leasehold improvement property in that the improvement does not have to be made pursuant to a lease and does not have to be made to a building more than three years old. For tax years 2016 and 2017, the rules still apply for defining qualified leasehold improvements. In addition, the 15-year recovery period for leasehold, retail, and restaurant improvements was made permanent by the PATH Act as well.
Qualified leasehold improvements completed before 2008 were eligible for a special 15-year recovery period. If in the year your lease term ends you move to another location, you can deduct the portion of the improvement cost that you have not previously deducted. This normal scenario won’t save you tax in the earlier years of the lease. Your landlord will have to put up the initial cash for the improvements, but you will cover that over time with increased payments in your rent. Since your landlord will be paying for the improvements, you will save tax early in the lease and your landlord will benefit as well!
At the same time, your landlord will gain depreciation deductions for the cost of the leasehold improvements. When you leave, your landlord will still have the improved property to offer other future tenants. It is a great opportunity for a win-win situation giving you faster access to invested monies.
4. Deduct Home Entertainment Expenses
If you host a company picnic or holiday party at your home, then the cost of meals at your home is a deductible expense and you can deduct 100% of your meal expenses. However, under tax reform, and starting in 2018, entertainment-related expenses are no longer deductible.
Prior to tax reform, 50 percent of your business-related entertainment expenses (with some exceptions) were generally deductible.
5. Deduct Holiday Gifts Without Receipts
Don’t overlook the deductible benefit of business gifts during the holidays or at any other time of the year. Whether you are a rank-and-file employee, a self-employed individual, or even a shareholder-employee in your own corporation, you can deduct the cost of gifts made to clients and other business associates as a business expense. The law limits your maximum deduction to $25 in value for each recipient for which the gift was purchased with cash.
6. Deduct Your Home Computer.
Tax reform legislation passed in 2017 repealed certain itemized deductions on Schedule A, Itemized Deductions for tax years 2018 through 2025, including employee business expense deductions related to home office use. Prior to 2018, If you purchased a computer and used it for work-related purposes as an employee, you were able to deduct the cost as long as you met certain requirements such as your computer must be used for convenience and as a condition of your employment, for instance, or if you telecommute two days a week and work in the office the other three days.
If you are self-employed, you can take advantage of Section 179 expensing even if you don’t claim the home office deduction. Section 179 allows you to write off new equipment (including computers) in the year it was purchased as long as it is used for business more than 50 percent of the time (subject to certain rules).
7. Have Your Company Buy You Dinner
Prior to tax reform, i.e., for tax years before 2018, this expense was 100 percent deductible. Furthermore, per tax reform legislation, this expense is nondeductible after 2025. However, for tax years prior to 2018 the following was allowed:
If you are in a partnership or a shareholder-employee in a regular C or S corporation, and you have to work overtime, your company can, on occasion, provide you with meal money for dinner. The cost of this “fringe benefit” is 50 percent deductible for your company under Section 132 of the Internal Revenue Code and you don’t have to pay personal income tax on the value of the meal.
Your company can pay directly for the meal or can instead, provide you with dinner money. But, in order for this to work, the amount of money you receive for your meal must be reasonable. If the IRS decides that the amount of money you received from your employer was unreasonable, the entire amount will be considered taxable personal income and will not be deductible.