Tax Focused Closeout Items To Finish The Financial Year Strong

By Jarrod Musick, Client Wealth Strategist, CFP®

We are in the final month of 2020, but there are still a few key things you should pay attention to in order to finish out the financial year in a good position. Here are our top three annual closeout items that entrepreneurs should focus on:

1. Tax withholding and safe harbor amounts
2. Optimizing gain or loss recognition with investments
3. Business equipment purchases

Notice that all three of these categories are tax-focused. If you haven’t met with your CPA team for a year-end tax planning session, be sure to get one scheduled now as an essential part of your keystone habits for business growth. Taxes are an annual adjustment process, and active planning can help you optimize your taxes for both this year and the next.

Safe Harbor Amounts and Limits

If you pay quarterly estimated taxes, which the vast majority of entrepreneurs do, you should be aware of your safe harbor limits. The Department of Revenue wants to ensure that you meet their standards and are not underpaying your personal federal taxes or are subject to underpayment penalties. The simple answer is to ensure that you paid at least 100% of what you did last year. If you pay at least 90% of what you owe for the current year, or 100% of what you paid in the previous year, you are considered to have met the safe harbor limit and will not be subject to underpayment penalties.

Your CPA can provide safe harbor limits advice, run very accurate year-end projections and calculate your estimated tax burden. Once you have that number, making sure you get to a 90% payment is easily done. Nobody enjoys taxes, but making sure you avoid underpayment penalties is a great use of your time during the last month of the year.

Investment Gain or Loss Recognition

To compile your tax projections, your CPA team will also need your investment income information for the year. These are the recognized short-term and long-term capital gains, dividends and interest incomes. As an entrepreneur, you also need to be aware of these categories arising from your business entities, because most are pass-through, meaning that gains and income show up on your personal tax return.

Optimizing your investment income for the year means knowing where you stand in terms of unrealized gains or losses. You have the option to sell various investments prior to the year-end in order to turn those unrealized gains and losses into realized ones. For example, in one tax year, it may make sense to offset gains with unrealized losses and even use a net $3,000 of losses to offset ordinary income. In another year, it may make sense to recognize a higher amount of total gains as your income is lower and may be subject to a lower capital gains rate. Make sure that you and your CPA have the full picture and work with your investment team to optimize your investment income for the year.

Business Equipment Purchases

Business equipment purchases are primarily geared toward ensuring your company has the resources to be successful going forward. The timing of these purchases can also help your total tax picture. Electing to accelerate a purchase for 2021 into December of 2020 could allow you to reduce your taxable income for the year. This should be done in concert with your CPA and your tax plan for both this year and next, but significant purchases have the potential to support your tax plan when they make sense.

Important note and disclosure: This article is intended to be informational in nature; it should not be used as the basis for investment decisions. You should seek the advice of an investment professional who understands your particular situation before making any decisions. Investments are subject to risks, including loss of principal. Past returns are not indicative of future results.