Your business exists to serve a human need. The better you meet that need the more you grow, the more people you can serve and employ, and the more lives you can change. That is the beauty of capitalism. Don’t let minimizing taxes distract you from maximizing value. 

I tell business leaders that paying more in taxes is the greatest indicator of your success. We can only do so much to minimize taxes. Eventually, we must pay Uncle Sam his portion. But we never want to pay more in taxes than required by law.

First, never make a business decision only to reduce your taxes. Buying an asset that doesn’t give you a great return on investment to get a tax deduction is a bad decision. 

Why? Buying assets as perks that don’t provide a great return on investment will distract you and your team from your primary goals. Those goals should be maximizing value for shareholders, customers and employees.

Owners and team members should be paid a market rate salary for what you do and earn on what you own. This is a key distinction that I learned from Greg Crabtree at www.simplenumbers.me. If you stay focused on the bottom line, your team will too.

Now let’s talk about tax-saving ideas. If any of these sound good to you, discuss them with your tax advisor. The rules are tricky.

1. Asset Purchases: This is one of the first things that comes to mind when we think about year-end tax planning. Again, do not buy assets that you do not need. Assets depreciate and you pay taxes to own them. Only buy assets that will provide a great return on investment for your business.

If you have asset purchases that meet the above criteria, year-end is a great time to make them. The new tax law has given us 100% bonus depreciation and expanded Section 179 rules that allow us to deduct many major purchases that were previously unallowed.

2. Cost Segregation: Cost segregation is the practice of analyzing real estate assets that you acquired or built to maximize depreciation expenses as quickly as possible. The new tax law makes this strategy even more valuable by bumping up bonus depreciation from 50% to 100% and expanding the assets that qualify.

3. Change in Accounting Method: The new tax law allows businesses with up to $25 million in gross receipts to take advantage of accounting methods that were only available to much smaller businesses. Your business may now be eligible to report on the cash basis. This is another great opportunity to maximize current year deductions and defer taxes.

4. Timing of Income and Expenses: If you are eligible to use the cash method of accounting for tax purposes, you should consider the timing of your income and expenses as you approach year-end.

If you expect to be in the same or lower tax brackets in 2021, you can minimize your 2020 taxable income by sending out invoices a little later. You can also pre-pay some expenses for 2020. There are limitations to this strategy, so check with your tax advisor.

5. Maximize Qualified Business Income Deduction: The 20% QBI deduction was a major element of tax reform. For tax years 2018-25, the deduction can be up to 20% of a pass-through entity owner’s QBI.

There are various limitations on the QBI deductions that can increase or decrease your allowable QBI deduction. Talk to your tax pro to make sure you are optimizing your deduction for this year.