I know we have too many problems in 2020 already, let’s focus ourselves on those “good problems”. If you think your taxable income will be too high in 2020, it’s still early to plan ahead to reduce your taxable income if you run a small business.
The most intuitive way is to pay some more qualified expenses in advance by Dec 31, 2020. IRS safe harbor rule (Reg 263(a) -4 (f)) allows your business to deduct the prepayment of certain expenses up to 12 months. The qualified expenses include insurance and rent.
Example
If your rent for business is $5,000 per month, you can consider prepaying the rent for 2021. Say on December 31, 2020, you prepay rent of $60,000 for 2021 and mail out the check to your landlord who may receive the check on January 4, 2021.
Your taxable income in 2020 will be reduced by $60,000!
Don’t worry, your landlord will not be mad at you. His or her income in 2020 will not be increased by $60,000 as he or she can elect to report the income on the check arrival date instead of the check date. The landlord can still report the rental income in 2021.
The burden of proof is on you, I recommend you use priority mail so that you have the tracking number to prove the date you mail out the check. Also, if you want to use this tax planning strategy, be sure to communicate with your landlord that your early payment won’t affect his tax in 2020.
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