Episode Fourteen: Year End Planning and Reducing Your 2020 Tax Bill
In this episode, Lance and Randy recap some of the ideas presented in their previous podcast about Cost Segregation while going into more detail about how to benefit from the CARES Act. As we enter the fourth quarter of 2020, they also discuss practical strategies for year end planning and reducing our annual tax bill.
What you’ll learn in this episode:
- September 15, the day the episode was aired, was, as Randy says, “the day many small business owners got slapped in the face by the IRS because they. . .didn’t do tax planning from the year before.”
- Speaking of late business tax return filings, Randy says owners can make a contribution to an IRA to create a deduction. If you’re self-employed and have no other employees, you can do a SEP.
- Prompted by Lance to list a “pecking order of tools,” Randy says a good basic strategy is to “write all the checks you can, spend all the things you need to spend your money on before the end of the year – and you’re gonna push off receiving your income until the year after.” He suggests you prepay whatever you’re allowed to, including insurance premiums and a new vehicle if you need one. He adds, “Get that money spent in 2020 to create all the expenses you can to reduce your capital, cash flow or your income, and then push all that capital and future income out into 2021.”
- While saying every individual should ask specifics from their CPA, Randy estimates that you can prepay office rent for one or two months to claim it for the future. “You wouldn’t be able to deduct it,” he says. “The idea is to be able to claim the deduction when you write the check.”
- The CARES act, passed in March, allows those who create a net operating loss this year to go back to previous years where they paid taxes and apply that loss towards that income and get the IRS to write a check back to you. Lance confirms, “Whatever your net operating loss is for this year, you can apply it against when you have positive gains up to five years back and get that back at whatever tax rate you were paying.” Randy adds, “You have until you file your tax returns next year to take a cost segregation study from this year and reduce your taxes next year. You have a year on this cost segregation to take advantage of the deductions for 2020.”
- Whether you’re a self-employed one-person shop or one with mom, pop and kids, simple things like 401(k)s and SEPs can work to your advantage. The idea is to be able to take pretax dollars and put them into one of these retirement plans to create a tax deduction – and then defer the earnings on those investments over time and pay taxes on them in the future.
- Many business owners who have a multitude of employees will default to a “Safe Harbor” plan. Randy explains, “If you want to put in your money, you have to put in 3% for all the other employees. If you have ten or 20, it can add up. You might end up putting in $20,000 worth of contributions for them just to deduct $19,000 from your 401(k). You have to ask yourself if that makes sense for you.
- A 401(k) is a defined contribution. The other option is the Defined Benefit Plan, which provides what Randy calls a “pot of gold” at the end of the rainbow. You can have as much as $3 million waiting for you when you retire. With the defined benefit plan, if you exclude the employees from the 401(k), they don’t get to participate. Then the employer, the owner of the business, can put significant amounts in and only tiny amounts for the employees.
- You can literally put profit sharing plans into place until December 31.
- Most businesses and most S corporations and LLCs especially, have a calendar year that begins on January 1 and ends December 31. But a retirement plan is actually a trust, a separate entity with its own tax ID number. Because of that, Randy says, we can create a fiscal year for the plan. He can create a planned end date on November 30, 2020, with a planned start date of December 1. That allows you to take two deductions in a single calendar year off your business. You can put, for example, $500,000 away in the year that ends November 30 and another $500,000 in the year that starts the next day. You can claim the entire amount off your 2020 taxes and still not have to fund it until September 15, 2021.
- Owning rental properties automatically creates a side gig where you can be manager of your properties and pay yourself a salary for that. You can create your own 401(k) on the company you own and where you’re the sole employee.
- Randy introduces the concept of a captive insurance company, which is an insurance company you own that allows you to play yourself the money for your insurance coverage and take a deduction from your operating company. You don’t have to claim it as income when you pay it to your insurance company. Captive insurance will allow you to put $2.3 million of premiums out of your operating business into your captive insurance company every year – and that’s a tax deduction to your business.
Resources:
Grab a FREE Copy of Lance’s Best Selling Book, How to Make Big Money in Small Apartments here.
Get Access to Lance’s Best-selling Small Apartment Wholesaling Course here.
Show Comments (0)
There are not comments on this post yet. Be the first one!