Don’t delay—by taking certain actions before December 31 you could cut your dance store or studio’s tax bill.
The holiday season is a busy time, and the last thing a dance business owner may be thinking about is taxes. Don’t make that mistake—you could be shortchanging your store or studio by missing out on opportunities to cut your tax bill with these year-end tax moves. Meet with your tax advisor as soon as possible and review the actions you should take by December 31, 2019 to optimize your tax picture—not just for 2019 but for 2020 as well. Your tax rates may be lower or higher next year as a result of changes in your revenues and in tax laws, and this must be factored into the actions to take now. The sooner you start, the less stressed you’ll be. Consider…
For dance retailers, the holiday season is a great time to connect with customers who are in a spending mood. If you sell gift cards and use the accrual method of accounting, you may not be taxed on the income this year. Report the income in the earlier of:
- the year in which the gift card is redeemed
- two years after the year in which the gift card was sold (even though not yet redeemed)
(Businesses with audited financial statements must report the income when it’s reported for accounting purposes if this is earlier than either of the above.)
If you’re concerned about data breaches that continue to occur, and how they could cost your business dearly in customer loyalty and financial loss, look into cloud technology to make your payments system secure. If you’re on the cash method of accounting and pay for a year of service by December 31, you can deduct the full payment this year.
Also, remember that advertising costs are immediately deductible.
Before the end of the year, decide on:
YEAR-END BONUSES If your business uses the accrual method of accounting, you can declare the bonuses by the end of the year for an immediate write-off as long as you pay employees their bonuses within two and a half months after the close of the year (different payment rules apply to bonuses for owners).
COMPENSATION FOR 2020 In setting your budget, factor in your payroll tax costs for raises. For example, the Social Security wage base in 2020 will be higher than in 2019, likely leading you to cap owner salaries at the new limit.
EMPLOYEE BENEFITS Decide now what the company will pay for in 2020, such as whether to offer health coverage and how much to pay toward this for each employee. Consider offering staff members a flexible spending account (FSA) to pay their out-of-pocket medical costs on a tax-free basis. Only employees contribute to FSAs, although there are some administrative costs to the company.
If you sell dancewear, you may be focused on plans for ordering in the coming year, but don’t ignore tax actions now. If you have leotards or dance shoes that have been sitting on your shelves for a while, consider taking an inventory write-down. To do this, you must clearly identify these items and offer them for sale at the write-down price for at least 30 days before the end of the year.
Alternatively, consider donating items to charity. A deduction for this giving usually is limited to your cost. However inconsequential your write-off may be, the items benefit others while allowing you to restock with new merchandise.
If you have inventory losses due to a casualty, such as Hurricane Dorian or the California wildfires, or due to theft, and insurance doesn’t fully compensate you, you can account for the loss by taking a casualty or theft loss. Or, you can adjust your cost of goods sold; insurance proceeds and other reimbursements under this option are taxable.
Look over your equipment and fixtures, including display racks, mannequins, barres, studio flooring, tablets and computers. Does anything need replacing? As long as you’re profitable, the cost can be immediately written off using the “Section 179 deduction.” This is true whether you buy new or used items and whether you finance your purchase in whole or in part.
Even easier, from a tax-reporting perspective than taking a Section 179 deduction, is to opt to treat equipment purchases up to $2,500 per item or invoice as “non-incidental material and supplies”; they’re fully deductible. This means the items don’t go on your balance sheet, but it also means you don’t have ongoing recording for the items (something required for the Section 179 deduction and other depreciation options).
If you report on the cash method basis, you have some flexibility in year-end tax planning. For example, you can ramp up your deductions by ordering supplies needed for next year. If you plan to attend a trade show or dance conference next year, book (and pay for) your travel and attendance now. In general, accelerating deductions is a good idea, but it becomes even more helpful if you expect to be in a lower tax bracket next year. For example, if you’re in the 35 percent tax bracket in 2019 but expect to be in the 24 percent bracket next year because of tax cuts, a $1,000 deduction saves you $110 more in taxes this year than if you delayed the write-off to next year.
Don’t ignore the opportunities that retirement plans offer: saving for retirement while reducing income that’s subject to tax. There are several retirement plan options. Figure what, if anything, your business can afford to contribute on behalf of employees, in order to select the plan that works best for your situation.
If you set up a 401(k) or other qualified retirement plan before the end of the year—all you have to do is sign the paperwork—you can complete contributions by the extended due date of your tax return. If you fail to set up the plan by year-end, you’ll still be able to both set up and fund a SEP-IRA plan by the extended due date.
In addition to a deduction for your plan contributions, as a small employer (100 or fewer employees) you may qualify for a tax credit of 50 percent of the cost of educating employees about the plan and other administrative expenses, up to a maximum credit of $500. The credit can be claimed for the first three years, but the plan must cover at least one person who is not an owner or “highly compensated employee.” If you choose to act this year, you can claim the credit for 2019, even though the plan starts in 2020.
Your Charitable Giving
Inventory isn’t the only thing you can donate. Cash contributions to local charities benefit your community and may increase your business’ visibility, and donations to national organizations are a worthy action, as well. Be sure to obtain a written acknowledgment for any donation of $250 or more and receipts for any smaller donations.
The Bottom Line
Don’t wait until the last minute to make the year-end tax moves that apply to your business. Consult with your tax advisor right away and help make the last few days of 2019 stress-free.
Last updated November 15, 2019
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.