As we approach the end of 2021, it’s time for NJ business owners to begin to limit their annual tax liabilities. Today we’re sharing strategies that we recommend to each of our clients who operate businesses locally.
- Create a Cash Balance Plan
Business owners who earn over $250,000 per year often benefit from incorporating a cash balance plan. While these plans are similar to traditional benefit plans, they are optimized via 401k.
While traditional benefit plans promise a monthly payment, cash balance plans guarantee a specific account balance when you retire at age 65. While it’s fine to begin contributing to this type of plan at any age, they are particularly beneficial to individuals aged 50 and up.
You can invest over $150,000 per year pretax in a cash balance plan. This will allow you to accelerate your retirement savings rapidly while reducing your taxable income significantly.
- Maximize Your Retirement Contributions
Regardless of the type of retirement plan you choose, it’s essential to max out your contribution to the best of your ability. Doing so will reduce your AGI, and you won’t be taxed on this income until you eventually withdraw funds.
You will likely be in a lower tax bracket during your retirement years, meaning your overall tax impact will be reduced if you sock away your income now.
- Maximize Your Health Savings Account Contributions
HSAs can be beneficial for your retirement savings, as well. When you place funds into your HSA, you’ll receive a tax deduction, and won’t be taxed when you use the funds later.
Remember, you don’t have to spend your account balance by the end of the year—only FSAs have that requirement—and a family can invest a maximum of $7,300.
- Sell or Donate Surplus Equipment, Furniture, and Inventory
Are you paying to store surplus business-related items? Outdated or unused goods, furniture, and equipment can be donated to a charitable organization for a tax credit.
There are regulations governing what can be donated, and in what quantities, so speak with us directly for advice before you arrange donation.
Alternatively, you can sell these items and divert funds into your retirement, cash balance plan, or HSA.
- Balance Your Books and Pay Your Bills
By year’s end, it’s essential that you sort out your balance sheet. This means having current figures, paying all outstanding bills, and examining your accounts receivables. It may be beneficial to defer invoicing until 2022—but some payers will not be amenable to deferring payment, because they, too, will be preparing for the end of the financial year.
- Make Charitable Contributions
Now’s the time to make any charitable gifts you’ve been planning. While individuals are unlikely to make itemized deductions under the new tax regulations, your business may still benefit from this approach.
- Consider SALT Deduction Limitation Workarounds
New Jersey has continued to enact workarounds for SALT deductions. Beginning just last year, the New Jersey Business Alternative Income Tax (BAIT) serves as an elective tax on pass-through business (i.e. LLCs, S-corps, and partnerships), providing a workaround to the federally-mandated limitation on state tax deductions.
If your business is a pass-through entity predominantly owned by New Jersey residents and operates via a significant New Jersey presence, you may benefit from BAIT workarounds.
At Halter CPA, we work with our clients all throughout the year to make sure they are prepared for all tax eventualities. It’s our job to see to it that you are not surprised by new legislation, requirements, or limitations. To touch bases regarding your year-end planning, please contact us via email or phone.