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Year-End Tax Planning Considerations for the Professional Services Industry

Many businesses in the professional service sector are working to minimize their tax liabilities in the final few weeks of 2022. Here are techniques to consider to further those saving efforts:

BONUS PLANNING: Consider giving owner-employees a year-end bonus that includes additional withholdings to cover personal tax liability from both the business and other personal taxable income. Plan to provide bonuses to staff before the end of the year to reduce the owner’s taxable income. For any businesses with income allocable to New York City, the bonus can and should be factored into the final NYC estimated tax payment as it would reduce the business’ tax liability by creating an additional expense. Examine the impact of bonus payment on the NYC alternative tax to even out the regular tax and alternative tax when making adjustments.

QBI DEDUCTION: Businesses with most of their income allocable to NYC should consider the QBI deduction’s tax impact when calculating bonuses. Also explore whether lower bonus payments would allow for a higher QBI deduction compared to the savings of NYC tax through a higher bonus deduction.

CREDIT CARD CHARGES: To conserve end-of-year cash availability and to accelerate additional expenses, use the company credit card to pay vendor bills, as this type of transaction is an accepted form of payment for cash-basis taxpayers. The balance can be paid when cash flow allows for it in the following year.

RETIREMENT EXPENSE: Contribute to a retirement plan to receive a tax benefit for the deduction. An analysis of funding amount and options for tax planning can also play a big part in reducing year-end profits (for example, increasing profit sharing contributions). Payments to a SEP plan are not due until the extended due date of the return, which allows the business to conserve cash at year-end. Payments made to an individual IRA must be made by the original due date of the individual return.

REQUIRED MINIMUM DISTRIBUTIONS (RMD): If you reach age 70 ½ in 2020 or later, you must take your first RMD from your retirement plan by April 1 of the year after you reach 72. Your RMD is the minimum amount you must withdraw from your account each year.

FIXED ASSET PURCHASES: Make any fixed asset purchases before the end of the year to benefit from Section 179 or bonus depreciation that can be taken to reduce taxable income. Purchases can be made with cash, financing or credit card. Fixed asset must be placed in service before end of year to be depreciable. Bonus depreciation phases out over the following four years, dropping to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Plan the timing of purchases accordingly to maximize benefit.

CHARITABLE CONTRIBUTIONS: These are allowed as a NYC deduction up to 5% of net income. Owners should consider making certain contributions through the business to lower NYC taxable income.

EXPENSE REIMBURSEMENTS: Reimburse owners for any business expenses paid for personally before the end of the year to attribute the additional expense in that year.

TAX RATES: Plan for possible tax rate changes that may occur. If the rates are expected to increase, consider holding off on paying certain expenses to the following year and/or delaying revenues.

PASS-THROUGH ENTITY TAX & OTHER BUSINESS TAX: Pay these taxes before the end of the year to take the additional deduction.

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