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end of year tax tipsWe’ve reached the end of the year; the time of year where you’re working on closing out your books for the calendar year. You may have already started planning for the new year and have set goals for 2021, but before you do, it’s important to look back at 2020 and determine how you can best utilize 2020 deductions when reporting the activity in 2021. There has been a lot of change when it comes to tax requirements and guidelines, so in this month’s blog we break a few of these down, some related to business income and others related to personal income.

Retroactive Bonus Depreciation for Business

The federal coronavirus relief bill and the CARES Act were passed by Congress in order to help offset some of the financial burdens on individuals and businesses due to the current pandemic. With its passing, new opportunities for deductions have emerged.

Thanks in large part to the CARES Act, a technical problem has been fixed that now allows a 100 percent bonus depreciation for qualified business improvements which are generally capital expenditures like remodeling the inside of buildings. It does not include improvements or remodeling for residential rentals or personal homes. It also does not include outside or structural remodels to your brick-and-mortar stores. However, the great news is that this is a retroactive fix, so businesses can fully deduct qualified improvements dating back to January 1st, 2018 by amending previously filed tax returns.

Business Income Reduction

If you are an accrual basis taxpayer, make sure that you accrue for 2020 expenses incurred prior to January 1, 2021.   If you incurred the expense but did not pay the vendor invoice until after year-end, the expense should be recorded in the correct expense category and a payable is set up on the balance sheet for the amount due.   If you are a cash basis taxpayer you generally record expenses when you pay the bill.  However, if your business charges expenses to a bank credit card, make sure that you record all 2020 expenses charged to the card prior to January 1, 2021.   Note this only applies to bank credit cards, not store cards.   If you are uncertain about which expenses you can claim at 2020 year-end, you should speak to your tax advisor.

Personal Charitable Contributions

We all know that donating to charity is a great way to give back to the community, but it is also a way to lower your taxable income. However, what you are able to deduct depends on whether you choose to itemize deductions or use the standard deduction. If you are taking the standard deduction, you would deduct a fixed amount of money based on your filing status and age. Previously, you were unable to claim charitable contributions while taking the standard deduction. However, thanks to the CARES act, even those individuals who are taking the standard deduction in 2020 can now claim up to $300 in charitable contributions when donating to qualified charities by the end of the year.

Another change is that, if you are itemizing your deductions this year, you are able to deduct all of your cash donations up to 100% of your adjusted gross income. The amount you were able to deduct was much lower in the past, so if you’re thinking about donating, now is the time to do it.

There have been a lot of changes this year due to the health crisis. If you have questions about your unique situation, our tax professionals can help. Reach out to us here.