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9 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 2021. Here are nine techniques to consider to further those saving efforts:

  • Bonus planning: Give owner-employees a year-end bonus that includes additional withholdings to cover personal tax liability from the business and other personal taxable income. Plan to deliver 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 their final NYC estimated tax payment, as it would reduce the business’s tax liability by creating an additional expense. One more factor: examine the impact of bonus payment on the NYC alternative tax to even out the regular and alternative taxes 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 accelerate additional expenses, use the company credit card to make vendor bill payments, 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 amounts and options for tax planning can also play a big part in reducing year-end profits (example: increase profit-sharing contributions). Payments to a SEP plan are not due until a tax return’s extended due date, which allows a business to conserve cash at the end of the year. Payments made to an individual IRA must be made by the original due date of the personal return.
  • 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 assets must be placed in service before the end of the year to be depreciable.
  • Charitable contributions: These are allowed as a deduction on NYC taxes up to 5% of net income. Owners should consider making specific contributions through the business to lower their NYC taxable income.
  • Expense reimbursements: Reimburse owners for any business expenses paid before the end of the year to pick up the additional expense in that year.
  • Tax rates: Plan for possible tax rate changes that may occur in the following year. If the rates are because of an increase, consider holding off on paying certain expenses until the following year and/or delaying revenues.
  • State Pass-through Entity Tax and Other Business Tax: Pay the taxes before the end of the year to take the additional deduction.

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