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Top 10 business income tax planning ideas for the pandemic

During this time when all businesses want to maximize cash for operations, some of the most basic tax planning ideas warrant the attention of all business owners. These “oldies but goodies” in the tax planning bucket can make a significant difference in reducing income tax, thereby increasing cash flow and even creating tax refund opportunities. Many of these ideas can be used on 2019 tax filings not yet completed.

Examine all business receivables to determine if a write-off can be taken

An accrual basis business can take an ordinary deduction for the write-off of a business bad debt. Care must be taken to ensure that the amount due cannot be recovered; otherwise, the actual collection of the receivable will create taxable income in a later year.

The worthlessness of a debt is determined by the particular facts surrounding each debt. The regulations do not contain a specific definition of the term “worthless.” The judicial standard for this determination is more pragmatic than it is legal. Court cases often rely on what could be considered sound business judgment in determining worthlessness.

Legal action is not required to determine if a receivable can be written off. Instead, if all the facts and circumstances indicate that legal action may not be effective, there is enough basis to write off the debt.

The bad debt deduction is only allowed for any debt that becomes worthless within the tax year for which the deduction is taken. Therefore, two determinations need to be made to support the write-off of a business receivable: both the actual worthlessness of the debt and the fact that the debt became worthless in the year that the deduction is taken.

A deduction can be taken if the receivable is partially worthless. It is permissible to take a partial worthless bad debt deduction as a receivable becomes worthless. On the other hand, a business can also defer the deduction to a later year when partial worthlessness is greater and take the accumulated amount in one year. The amount written off in any year must also be charged off on the entity’s books and records. Furthermore, the business can defer taking any deduction until the year that the debt is totally worthless. However, the deduction cannot be postponed beyond the year the debt is completely worthless.

To read the complete June 25 Tax Insider Newsletter post, click HERE.  For guidance on business income tax planning ideas for your business, contact a Dugan & Lopatka professional at info@duganlopatka.com or (630) 665-4440.  

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