Burcu Bree Manay

You can feel overwhelmed when you search our archive library for strategies that apply to the self-employed.

For example, a search today will yield more than 263 strategy articles with the words “self-employed” or “selfemployment.” That’s a lot.

Where do we start?

Now, instead of feeling overwhelmed by the more than 263 possible strategies, you can start with the 10 below:

1. Use the Section 05 plan to make your health insurance a tax-favored business deduction on your Schedule C.
2. Employ your under-age-18 child to make taxable income disappear.
3. Employ your spouse without paying him or her a W-2 wage.
4. Rent your office, even your home office, from your spouse to save self-employment taxes.
5. Establish that an office in your home is your principal office to increase (yes, increase!) your vehicle deductions and also turn personal home expenses into business expenses.
6. Give yourself flowers, fruit, and books as tax-deductible fringe benefits.
7. Combine the home office and a heavy SUV, crossover vehicle, or pickup truck to grab big deductions this year.
8. Design a business trip that includes some personal days—days you treat as 100 percent business even though you don’t work on those days.
9. Use the seven-day tax deduction travel rule to create a business trip that is 87 percent personal vacation.
10. Deduct your smartphone and provide smartphones to your employees as tax-free fringe benefits.

If one or more of these looks good to you, let’s talk about how to make them work.

Higher taxes on income and transfer taxes are around the corner!

President-elect Joe Biden’s plan aims to amend higher taxes on corporations and high-income individuals while protecting taxpayers with incomes of less than $400,000 from tax rate increases.

Please keep in mind that this proposal would need to be passed by Congress to become law, and any of its provisions may be revised or eliminated in the future. 

In this article, you will see the possible rate changes on the current tax law:

Changes in the Tax Rates 

Ordinary Income: Currently, the top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married filing jointly. 

After Biden’s plan, the ordinary income tax rate would be 39.6% for taxable income above $400,000. 

Preferential Income (Long-term capital gains, dividends): According to current tax law, the top tax rate is 20% for income over $441,450 for individuals and $496,600 for married filing jointly. 

The preferential tax rate for those tax taxpayers making more than $1 million would increase from 20% to 39.6% with Biden’s plan. 

Pass-Through Income: Currently, if you run a partnership, corporation, or individual company, your pass-through income is eligible for a 20% deduction until 2025.  

After Biden’s proposal, 20% deduction would only apply to the taxpayers whose income is more than $400,000. 

Corporate Tax: One of the provisions of the Tax Cuts and Jobs Act (TCJA) was the reduction in the corporate tax rate to 21% from its prior-law level of 35%. 

Biden’s proposal would increase the corporate tax rate from 21% to 28%.

Carried Interests: According to current tax law, the top rate applicable to long-term capital gains is the 20% rate for carried interest, which applies to carried interest if held for more than three years.

Within Biden’s plan, carried interests would be taxed at ordinary income rate, %39.6. 

Estate and Gift Tax Rate: Biden’s proposal would increase the estate and gift tax top rate from 40% to 45%. 

Unified Credit / Lifetime Exclusion Amount: The lifetime gift tax exemption amount is the amount individuals can give away during their lifetimes without having to pay any gift taxes on the transfer to the recipients.

In 2020, the lifetime exemption amount is $11.58 million per person. This amount was temporarily increased under the Tax Cuts and Jobs Act of 2017 (TCJA), which went into effect on January 1, 2018. Before that, the lifetime exemption amount was approximately $5.5 million per person. 

After Biden’s plan, it seems that the lifetime exemption amount will be lowered to pre-2018 levels before 2025, which would be somewhere around $5.5 million but potentially may fall to levels as low as $3.5 million per person.

Date of Death Basis step-up: Step-up on the basis which is the readjustment of the value of an appreciated asset for tax purposes upon inheritance would be repealed with Biden’s Tax Plan. 

What Else Would Biden’s Tax Proposal Bring? 

• Renewable energy incentives and restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit
• Payroll taxes (15.3% combined Social Security and Medicare Taxes) which apply to wages above $400,000
• Limit itemized deductions by restoring limitations for those with income greater than $400,000
• Canceling of the cap on state and local tax deduction

Takeaways

• Is your annual income of more than $400,000? If so, you need to take a look at Biden’s Tax Proposal. 
• To avoid the possible increase in the preferential income tax rates, consider accelerating your capital gains and dividend income realizations.
• To defer the capital losses, consider NOL carryforwards

The purpose of this article is to get the IRS to owe you money. 

Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes. 

This article gives you seven powerful business tax deduction strategies that you can easily understand and implement before the end of 2020. 

1. Prepay Expenses Using the IRS Safe Harbor 

You just have to thank the IRS for its tax-deduction safe harbors. 

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2020 prepayments cannot go into 2022. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule. 

For a cash-basis taxpayer, qualifying expenses include, among others, lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums. 

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Thursday, December 31, 2020, you mail a rent check for $36,000 to cover all of your 2021 rent. Your landlord does not receive the payment in the mail until Monday, January 4, 2021. Here are the results: 

• You deduct $36,000 in 2020 (the year you paid the money).

• The landlord reports $36,000 as rental income in 2021 (the year he received the money).

You get what you want—the deduction this year.

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable. 

Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2020, he would have had to pay taxes on the rent money in 2020. 

Before sending a big rent check to your landlord, make sure the landlord understands the strategy. Otherwise, he might not deposit the rent check (thinking your payment was a mistake) and instead might return the check to you. This could put a crimp in the strategy, because you operate on a cash basis. 

Also, think proof. Remember, the burden of proof is on you. How do you prove that you mailed the check by December 31? (Think like an IRS auditor or, better yet, a prosecuting attorney.) 

Answer: Send the check using one of the postal service’s tracking delivery methods, such as priority mail with tracking and possibly signature required, or one of the old standards, such as certified or registered mail. 

With these types of mailings, you have proof of the date that you mailed the rent check. You also have proof of the day the landlord received the check. 

If you are using USPS online tracking, make sure to print the delivery and receipt tracking results for your tax records, because that tracking information disappears from the postal service records long before you would need it for the IRS. 

2. Stop Billing Customers, Clients, and Patients 

Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2020. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.) 

Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years. 

Example. Jim Schafback, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2020 income by moving that income to 2021.

3. Buy Office Equipment 

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31 and get a deduction for 100 percent of the cost in 2020.

Qualifying bonus depreciation and Section 179 purchases include, among others, new and used personal property such as machinery, equipment, computers, desks, furniture, and chairs (and certain qualifying vehicles).

4. Use Your Credit Cards Correctly 

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit cards for last-minute purchases of office supplies and other business necessities. 

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31. 

5. Don’t Assume You Are Taking Too Many Deductions 

You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss. 

But this won’t happen to you. Why? Because, as a subscriber (member), you know all deductions are valuable. And you know even those deductions not used this year can create tax benefits for you in the future. 

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are just starting your business, or with all that’s happened this year, you could very possibly have an NOL. And the good news is that NOLs can turn into cash infusions for your business, as explained directly below. 

6. Thank COVID-19

Let’s be real: there’s little to be grateful for with COVID-19, with one of the exceptions being the potential opportunities to turn NOLs into cash for your business.

Two NOL exceptions come from the Coronavirus Aid, Relief, and Economic Security (CARES) 

1. The CARES Act allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years for refunds against prior taxes.
2. The CARES Act allows application of 100 percent of the NOL to the carryback years.

Before the CARES Act, you could not carry back your 2018, 2019, or 2020 losses, and your NOL could offset only up to 80 percent of taxable income before your Section 199A deduction. 

If you have an NOL, consider doing the following: 

• For a 2018 NOL, file amended returns.

• For a 2019 NOL, for a quick refund, file a tentative refund claim before December 31, 2020, or file an amended return later.

• For a 2020 NOL, get your tax info together quickly so you can file early next year—you have to file your tax return before you can claim an NOL carryback.

7. Deal with Your Qualified Improvement Property (QIP)

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made in the Tax Cuts and Jobs Act (TCJA). 

QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service. 

If you have such property on an already filed 2018 or 2019 return, it’s on that return as 39-year property. You now have to change it to 15-year property, eligible for both bonus depreciation and Section 179 expensing. 

Takeaways

When it comes to your taxes, business deductions are king. The more business deductions you can claim, the better. The more business deductions you claim, the less you pay in regular taxes. 

Yes, paying less in taxes is good. 

Here are the seven last-minute tax deduction strategies we covered in this article: 

1. Prepaying your 2020 expenses right now reduces your taxes this year, without question. While it’s true you kicked the can down the road some, perhaps you have an offset with a big deduction planned for next year. And even if you don’t have such a plan at the moment, you have plenty of time to create one or to put additional big deductions in place for 2021.

2. The easiest year-end strategy of all is simply to stop billing your customers, clients, and patients. Once again, this kicks the can down the road some and makes your 2021 tax planning more important.

3. With 100 percent bonus depreciation and increased Section 179 expensing in 2020, you can make significant purchases of equipment, machinery, and furniture and write off 100 percent of the value. Make sure you place the assets in service on or before December 31, 2020, to get the deduction this year.

4. Charges to your credit cards can create deductions on the day of the charge. This is absolutely true if you are a sole proprietor or if you operate as a corporation and the credit card is in the name of the corporation. But if you operate as a corporation and the credit card is in your personal name, your corporation needs to reimburse you before December 31 to create the 2020 deduction at the corporate level.

5. Make sure to claim all your legitimate deductions. Don’t think you have too many, and don’t try to avoid deductions that you think could be a red flag. First, it’s unlikely you could have enough deductions to create a red flag. Second, no one knows what those red flags are. Third, if the deduction is legitimate, it doesn’t matter if the IRS audits it—you’ll win.

6. If your deductions exceed your income, you will have a loss for the year and that loss can create an NOL. The good news here is that the NOL can give your business a cash infusion from the taxes you paid five years ago.

7. If you placed QIP in service in 2018 or 2019, you have some work to do because that QIP is no longer 39-year property; it is 15-year property and requires a 100 percent bonus depreciation deduction if you don’t elect out of bonus depreciation.

It’s time to examine your existing business and personal (yes, personal) cars, SUVs, trucks, and vans for some profitable year-end business tax deductions. 

In this article, we will first look at your prior and existing business vehicles that you or your pass-through business owns. Then, we will take a look at your personal vehicles as a possible source for a last-minute tax-saving deduction. 

Let’s start with prior and existing business vehicles. 

Your first step is to identify your gain or loss on sale. Once you have the gain or loss, know these basic rules: 

• Gains attributable to depreciation produce ordinary income.

• Gains in excess of original basis produce capital gains. (This is unlikely to happen on most business vehicles, but it can happen with classic and antique business vehicles because they can go up in value.)

• Losses on business vehicles produce ordinary deductions.

You report gains and losses on IRS Form 4797, which means those gains and losses travel outside of the business income and expense categories and thus have no effect on self-employment taxes. 

Now you have the basic rules. In general, at this time of year we suspect you are looking for vehicle loss deductions, so that’s where we will look. 

Described below are four existing-vehicle tax-deduction strategies that you may be able to use. As with all year-end strategies, don’t wait! If you want the deductions this year, you need to complete the required action on or before December 31, 2020.

1. Take Your Child’s or Spouse’s Car and Sell It

We know—this sounds horrible. But stay with us.

What did you do with your old business car? Do you still have it? Is your child driving it? Or perhaps your spouse has it as a personal car. 

We ask because that old business vehicle could have a big tax loss embedded in it. If so, your strategy is easy: take the vehicle and sell it to a third party before December 31 so you have a tax-deductible loss this year. 

Your loss deduction depends on your percentage of business use. That’s one reason to sell this vehicle now: the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive. 

Planning tip. Consider buying a replacement vehicle for your teenager or spouse before taking away his or her vehicle—this is not a tax tip, but a family harmony tip. 

If the old business vehicle would produce taxable gain, do nothing. You want the personal-use percentage to continue to grow and to reduce your ultimate tax bite. 

2.Self-Employed? Use the Buy-and-Sell Strategy 

All business vehicles have gain or loss on sale. 

The Tax Cuts and Jobs Act (TCJA) eliminated the tax-deferred exchange for vehicles. Now the vehicle trade-in is nothing more than a sale of the vehicle to the dealer. 

Thanks to this new TCJA rule, many self-employed taxpayers will come out ahead because their trade-ins automatically take advantage of the buy-and-sell strategy. 

Here’s how the strategy works: 

• The sale to a third party or the trade-in “sale” of your existing business vehicle produces a gain or loss that does not increase or decrease your self-employment taxes.

• The purchase of the replacement vehicle creates depreciation and, if elected, Section 179 expensing deductions. These deductions reduce your self-employment taxes. (Note: This is also true with IRS mileage rates, because such rates include depreciation as a component.)

Example. Billy trades in his old zero-basis business vehicle. The dealer gives him $17,000 as a down payment on his replacement vehicle. This creates a $17,000 taxable gain ($17,000 trade-in selling price minus a zero basis). 

On this gain, Billy does not pay any self-employment taxes. Why? The gain is a Section 1231 gain that Billy reports on his IRS Form 4797. The gain never gets to Billy’s Schedule C or his Schedule SE.

On the purchase of his new SUV with a gross vehicle weight rating of greater than 6,000 pounds, Billy uses bonus depreciation on his 100 percent business-use percentage and deducts $41,000. Billy, who makes about $125,000 a year, saves $5,793 in self-employment taxes ($41,000 times 14.13 percent).1 

In summary, Billy’s taxes look like this on December 31:2 

• Taxable gain of $17,000

• Bonus depreciation deduction of $41,000

• Income tax savings of $7,680 [32 percent times ($41,000 – $17,000)] · 

Self-employment tax savings of $5,793 

To make the gain and depreciation offset, Billy simply traded in his old vehicle on the new vehicle. Then the new law took over to make that trade a sale, which gives him the buy-and-sell benefits described above. 

3. Cash In on Past Vehicle Trade-Ins 

In the past (before 2018), when you traded vehicles, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, this rule doesn’t apply any longer to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.3)

Regardless of whether you used IRS mileage rates or the actual-expense method for deducting your business vehicles, you could find a big deduction here. 

Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 11 years, during which he 

• converted his original personal car to business use;

• then traded in the converted car for a new business car (car two);

• then traded in car two for a replacement business car (car three); and

• then traded in car three for another replacement business car (car four), which he is driving today.

During the 11 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates. 

If Sam sells his mileage-rate car today, he realizes a tax loss of $27,000. The loss is the accumulation of 11 years of car activity, during which Sam never cashed out because he always traded cars (this was before he knew anything about gain or loss). 

Further, Sam thought his use of IRS mileage rates was the end of it—nothing more to think about (wrong thinking here, too). 

Because the trades occurred before 2018, they were Section 1031 exchanges and so deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component. That’s one possible reason Sam unknowingly accumulated his big deduction. 

To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car 4, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis. 

Examine your car for this possible loss deduction. Have you been trading business cars? If so, your tax loss deduction could be big! 

And this most satisfactory result is true with both the IRS mileage-rate method and the actual-expense method for deducting your vehicles. 

If you have been trading in your cars, calculate your adjusted basis and compare it with your possible selling or trade-in price to see your expected gain or loss on sale. If the loss is large and you are in need of tax deductions, sell or trade in that vehicle on or before December 31. 

4. Put Your Personal Vehicle in Business Service 

Lawmakers reinstated 100 percent bonus depreciation, and that creates an effective strategy that costs you nothing but can produce solid deductions as outlined in TCJA: Convert Personal Vehicle to Business and Deduct up to 100%. 

Are you (or your spouse) driving a personal vehicle? Would you like to increase your tax deductions for this year? If so, read the article linked above. 

S or C corporation. If you operate as a corporation, read the article linked above and also read TCJA: Don’t Lose Out When Corp. Vehicle Is in Your Personal Name. 

Warning! The cash-basis corporation must pay the reimbursement on or before December 31, 2020, to get the deduction in 2020.

Big picture. This strategy allows you to take an existing personal vehicle, convert it to business use, and find a solid business deduction this year. 

Takeaways 

Your existing vehicle can produce last-minute 2020 tax deductions with one of the four strategies described in this article and summarized below: 

1. Did you give your old business vehicle to your child or spouse? Find out whether that vehicle has a loss deduction inside it. If it does, take the vehicle away from your child or spouse, and sell it so you can deduct the loss.

2. Are you self-employed? If so, use the buy-and-sell vehicle strategy before December 31 to reduce both your income and self-employment taxes.

3. Have you been trading in your old business vehicles on their replacements? If so, calculate your possible loss deduction now. You might find a big deduction.

4. Do you or your spouse own a vehicle (new or used) that you purchased but never deducted for tax purposes? If so, convert that personal vehicle to business use to take advantage of the new bonus depreciation.