Bunching Tax Deductions

Lots of the old tax rules have changed in the last few years.  If you haven't reviewed and adapted, you are likely paying your rich Uncle Sam too much.  The Tax Cut and Jobs Act (TCJA) combined the amounts for standard deductions and exemptions into one number.  The Act also eliminated deductions entirely.  This effectively removed itemized deductions for many tax payers since the standard deduction/exemption for 2020 is $24,800 (married filing jointly).

Bunching

One strategy that solves this is bunching tax deductions.  Simply put it is paying deductible expenses in one year to get over the threshold of the standard deduction.  For example, real estate taxes are due every year.  If you are under the standard amount, you could pay the next year's taxes before December 31st, effectively paying two years in the same calendar year.

Another strategy is to shift itemized deduction items to your business.  Of course they have to have a business purpose, just as any deduction on your business tax return.  One common item would be charitable contributions.  Businesses can deduct contributions as a business expense if 1) it relates to your business and 2) you expect to generate revenue from the expense.  So instead of a straight donation, you use it as advertisement.  Alternatively, you could donate a portion of your sales to the charity.

Non Deductible Expenses

Some itemized deductions that are no longer deductible can be shifted to the business as well.  For instance, unreimbursed business expenses are not longer an itemized deduction (and they weren't fully deductible in the first place).  Paying these expenses through the business instead of personally assures full deductibility. This doesn't apply to Partnerships.  Unreimbursed partner expenses are still deducted as an offset against income from the Partnerships.

This works for your employees as well.  If they are paying business expenses for doing their job, consider reimbursing them.  It is effectively a raise for them without you having to pay the related payroll taxes.  For information on the correct way to handle reimbursing expenses from the business, read this article.