10 things a California business owner should do before January 1st
Part of the joy of being a California business owner is setting your terms. You get to decide what you do and when you do it. But there are hard and fast deadlines in the business world when it comes to California small business taxes.
So, if you run a business in California, here’s what you should do before the end of the calendar year to prepare for tax season.
1. Shape up your tax situation
The end of your fiscal year is an excellent time to tweak your financial situation. The right moves can set you up to get the best tax deal, especially if your net income is higher than usual.
There are 2 main strategies to do this:
Reduce your income
Any income you can defer past December 31st will lower your revenue and income tax bill. This usually means delaying some of your customer invoicing to count the income in the next tax year instead of this year.
Keep in mind this only works if your business is on a cash accounting system—most small businesses operate on a cash basis, so you should be okay. But check with your accountant to be sure.
Maximize your expenses
Along with reducing your business income, increasing your expenses can lower your revenue. Lower revenue can equal a lower income tax rate or lower payments (or both). If you’ve been considering a big business purchase, you may want to get it in before January 1st. Then, you can claim the deductions on this year’s taxes.
2. Review the business structure you set up
Choosing a business structure isn’t something you should take lightly. But you might not realize that it isn’t a “set it and forget it” decision. According to the U.S. Small Business Administration (SBA), you can change the structure down the road.
Remember that how your business is set up determines how taxes are calculated. The end of the year is an opportune time for California small business owners to sit down and review their business entity structure.
Are you doing business under a sole proprietorship? Being taxed as a limited liability company (LLC)? Could you cut your tax bill by changing your business tax status to an S corp? You should also consider:
- Upgrading to a California LLC if you’re a sole proprietor
- Forming a general partnership or limited liability partnership (LLP) if you’re in business with at least one other person
- Setting up a California corporation to increase protection against personal liability
Federal tax is the same no matter where you live, but state income taxes can have different rules. Your best bet is to sit down with an accountant or tax attorney who can run the numbers and answer all of your tax return questions.
3. Claim first-year bonus depreciation
Small business owners can cash in on a tax break, thanks to the Tax Cuts and Jobs Act (TCJA) enacted at the end of 2018. It allows taxpayers a 100% first-year bonus depreciation. This means you can write off the cost of eligible items the year you buy them for use by the business to lower your taxable income right off the bat.
For example, suppose you buy four new computers for your business, and they cost $5,000 each (for a total of $20,000). You can claim first-year bonus depreciation on that full amount—meaning you’d be able to write off $20,000 right away rather than taking deductions over time.
It typically applies to depreciable business assets (equipment and other property that loses its value over time) with a lifespan of at least 20 years:
The bonus only goes through January 1st, 2023, so time is running out to claim it.
4. Check on your business retirement plan
It’s not too late to check on your business retirement plan before you ring in the new year. If you haven’t maxed out your IRA, 401(k), or defined-benefit contributions for the year, now is as good a time as any to get that ball rolling:
- SEP IRA: If you’re self-employed, contribute up to 25% of your earnings per year, as long as you don’t go over the $61,000 cap in 2022 ($58,000 for 2021).
- Solo 401(k): This lets you contribute up to $20,500 in 2022 ($19,500 for 2021), with a catch-up contribution amount of $6,500 if you’re over 50. The business can also make profit-sharing contributions up to 25% of payroll, for a total of $61,000 for 2022 ($58,000 for 2021).
- Defined-benefit pension plan: If you’re a high-income small business owner with extra cash to max out your contributions, this option can get you the biggest tax savings. It isn’t easy to set up, but it can be worth it.
Maximizing these plans can help keep more of your hard-earned cash away from taxes and invested toward further growth opportunities. If you haven’t met your maximum, you can direct any extra money to business retirement accounts—you’ll thank yourself in a few decades.
5. Hire the right accountant
Running a small business in the state of California means there are thousands of financial and tax rules to follow. One of your top priorities should be finding an accountant who can help you navigate those waters without drowning.
If you have a trusted tax pro—great! But if you don’t nab a good one before the general tax season hits full stride, you’ll regret it. To save time and money, be sure to do your homework and hire someone who has experience with small business filing requirements—ask friends for recommendations or head to Yelp to read reviews from other clients.
6. Determine eligibility for the home office deduction
When you run your business out of your home office, you may be able to claim a deduction for tax purposes. According to IRS.gov, it requires the space to meet 2 specific conditions:
- Used regularly and exclusively for conducting business
- Used as your principal place of business
The simplified home office deduction option allows you to deduct $5 per square foot up to 300 square feet of space. You may also use the regular, more difficult method of calculating actual expenses against your overall household expenses (mortgage interest, taxes, maintenance, repairs, insurance, utilities, and other costs).
7. Review your financial reports
The end of the year is the best time to check your records. Is everything where it should be? Any gaps in your record-keeping? Now’s the time to fill them. If you don’t have accounting staff, consider hiring an accountant or bookkeeper for help. In your review, look for:
- Underpaid tax payments
- Incorrect or missing employee records
- Missing or incomplete W2 and 1099-MISC forms
- Any other mistakes that might get you into trouble come tax time
Also, scan your employee benefits and deductions to make sure they’re accurate, and you have the correct wage listed for each employee. Check on each employee's sick and vacation time and make sure everything checks out.
Finally, if you offered any taxable benefits to your employees throughout the year, now is the time to post them to payroll. Did you provide a car for personal use? Give away a cruise for the most sales in a month? Pay for employee parking? All of those benefits are taxable.
8. Consider a charitable donation
Giving may be its own reward, according to social activist Dorothy Day, but tax law offers benefits to many types of businesses that give to nonprofit organizations. Charitable donations are one of many tax-deductible expenses that can lower your taxable income.
Small business owners may donate by volunteering their time, sponsoring a sports team, launching a charity drive, or giving cash offerings. You can typically deduct up to 60% of your adjusted gross income for charitable contributions. However, the TCJA made claiming tax deductions for donations more difficult, so talk to a tax professional about your options.
9. Think ahead to optimize your California small business taxes next year
Don’t despair if you’re reading this and tax season is already in full swing! You may be out of time this year, but that doesn’t mean you should kick your small business tax strategies down the line until next year.
Starting now gives you more time to plan. You can make necessary adjustments to put your small business in the best possible position when it comes time to pay taxes. By carefully evaluating how potential changes might impact your finances, you can save yourself from making some costly mistakes.
10. Shop around
Finally, if you haven’t shopped around for insurance recently, the end of the year is a great time to do it. Go ahead and run new quotes for workers’ comp and business insurance—you might be surprised to see how much you could save.
The same is true for vendors. If you’ve been getting eager pitches from new vendors, take a few minutes to see if any of them might be a good (and less expensive) alternative.
You can also call around to your regular vendors to see if you can negotiate better deals on any regular expenses. Now that you’re a known client, you’ll likely have better leverage for negotiation.
Shopping around might save you a little. Or it might save you a lot. Either way, reducing your expenses feels great and can give next year’s finances a boost.
If your end-of-year financial plans include a workers’ comp quote, feel free to give Huckleberry a shot. You don’t have anything to lose—it only takes 5 minutes to get an instant estimate. We use tech and data science to make everything easy, and the whole process is completely online.