Whether you have a financial person do your taxes or handle them yourself, it pays to be alert to opportunities to cut your tax bill. Here’s what to know before you file.
You’ve closed your studio or store’s books on 2019, but you’re not finished with that year yet. (Sigh.) You have to file a tax return to report your business’ income and expenses for the year. Because of tax law changes and cost-of-living adjustments, things now are a little different from last year. When it comes time to prepare your return—or to sit down with your CPA or tax preparer, here’s what to consider if you want to minimize your final tax bill.
Take another look at the Qualified Business Income deduction.
The Qualified Business Income (QBI) deduction is a tax break introduced last year for certain small businesses. It can be as much as 20 percent of profits and is gradually phased out and then eliminated based on certain income limits. But because of inflation adjustments to those income limits, you may be eligible for this tax break for 2019 even if your income is higher than it was in 2018—or you may get a greater QBI deduction.
Here’s how it works: Your studio, store or other dance business must be an LLC, S corporation, partnership or sole proprietorship—so-called pass-through entities. (Note: Performers, like athletes, may not get any deduction because of special limits on specified service trades or businesses.) While QBI is not a business deduction, it is calculated from your business income. The deduction reduces the taxable income on your personal return which, in turn, reduces your tax bill for the year.
Check for more favorable limitations for 2019 on other write-offs, too.
See if you might benefit from carryovers from earlier tax years.
In previous years, you may have been unable to take some tax breaks due to annual limits on the amount of a deduction or credit. The unused portion carries over (forward) to a future year. Don’t overlook the possibility of claiming them now. Check for these carryovers:
If your business is on the cash method of accounting and you paid certain expenses—rent, insurance, subscriptions—covering multiple years, your deduction in the year of payment may have been limited to a portion of the cost. Check whether you have any remaining amount to deduct now. For example, in late 2017, you paid for a three-year subscription to Pointe magazine, so the portion of the cost related to the months enjoyed in 2019 is deductible on your 2019 return.
Net operating loss
If your business had a loss in an earlier year that you were unable to deduct then, you may have a carryforward that can be used now. A carryforward of a net operating loss that arose after 2017 can offset up to 80 percent of your current taxable income (earlier losses can offset 100 percent of taxable income).
General business credit
If your business had any tax credit, such as the small-employer health-insurance credit or the disabled-access credit, that was limited due to the general business credit rules, you may have a carryover to 2019.
Don’t miss these post year-end tax moves you can still make.
You still have time to make decisions now that can favorably impact your 2019 return. Consider:
How you elect to treat certain things on your return
In some instances, you have choices on how to handle certain business expenses. For example, if you purchased display fixtures for your store or new barres for your studio in 2019, you can write off the full cost on your 2019 return instead of depreciating the cost of this equipment over a number of years. You can use first-year expensing (the Section 179 deduction) or bonus depreciation (100 percent of cost). Or there’s also a special tax rule helpful for writing off low-cost items without having to name what they are on the tax return.
If you had a not-so-good year in 2019, you may want to forego upfront deductions to “save” depreciation allowances for future profitable years when they’ll save more taxes for you.
Funding a qualified retirement plan
One way for you to shelter your business profits is through a qualified retirement plan into which you put tax-deductible contributions (i.e., you reduce your current taxes). If you have a 401(k) plan or other qualified retirement plan (or you signed the paperwork for one by the end of the year), determine how much you can and want to contribute for 2019. You have until the extended due date of your return to put in the money and take the deduction on your 2019 return.
If you don’t have a plan already set up, you can still sign the paperwork for a Simplified Employee Pension (SEP) and fund it for 2019 (again, up to the due date of the return, or the extended due date if you obtain a filing extension). Factor in the cost of covering your employees and the opportunity to take a tax credit for setting up the plan and educating employees about it. If you merely want to add to your IRA or Roth IRA if eligible, the deadline for 2019 contributions is April 15, 2020, regardless of whether you get a filing extension. Check for new contribution limits and other changes for 2019.
Contributing to a health savings account
If you had a high-deductible health plan as your medical coverage in 2019 and you weren’t enrolled in Medicare, you can contribute to health savings account as late as April 15, 2020 (a filing extension doesn’t give you more time). Again, contribution limits for 2019 have changed.
Look for refund opportunities on 2018 returns.
Late in December 2019, Congress extended retroactively numerous measures that expired at the end of 2017. The extended rules apply for 2018, 2019 and 2020. When you’re discussing your 2019 return with your tax preparer, review whether any of the extended rules apply to you and warrant your filing an amended return for 2018. For example, if your store or studio is located in an empowerment zone, various tax breaks related to doing business there have been extended retroactively. If any apply for 2018, consider filing an amended return to obtain a tax refund.
The Bottom Line
Gather your tax return information if you have not yet done so and schedule an appointment with your CPA or other tax return preparer. It’s not too late to possibly still make some moves that will cut your tax bill. And the sooner you get started on this annual chore, the less stressed you’ll be.
Barbara Weltman, an attorney and small-business expert, is the author of J.K. Lasser’s Small Business Taxes 2020: Your Complete Guide to a Better Bottom Line and publisher of “Idea of the Day” at bigideasforsmallbusiness.com.