The purpose of this article is to get the IRS to owe you money.
Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.
Over the next few weeks, I will be writing small articles with a powerful business tax deduction that you can easily understand and implement before the end of 2020.
If you would like to get these articles directly in your email, just send me an email at firstname.lastname@example.org and in the subject line write “tax deductions”.
Okay, here’s the first:
1. Prepay Expenses Using the IRS Safe Harbor
You just have to thank the IRS for its tax-deduction safe harbors.
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2020 prepayments cannot go into 2022. this makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include, among others, lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Thursday, December 31, 2020, you mail a rent check for $36,000 to cover all of your 2021 rent. Your landlord does not receive the payment in the mail until Monday, January 4, 2021. Here are the results:
You deduct $36,000 in 2020 (the year you paid the money).
The landlord reports $36,000 as rental income in 2021 (the year he received the money).
You get what you want–the deduction this year.
The landlord gets what he wants–next years entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
But don’t surprise your landlord: if he had received the $36,000 of rend paid in advance in 2020, he would have had to pay taxes on the rent money in 2020.
Before sending a big rent check to your landlord, make sure the landlord understands the strategy. Otherwise, he might not deposit the rent check (thinking your payment was a mistake) and instead might return the check to you. This could put a crimp in the strategy, because you operate on a cash basis.
Also, think proof. Remember, the burden of proof is on you. How do you prove that you mailed the check by December 31? (Think like an IRS auditor or, better yet, a prosecuting attorney.)
Answer: Send the check using one of the postal service’s tracking delivery methods, such as priority mail with tracking and possibly signature required, or one of the old standards, such as certified or registered mail.
With these types of mailings, you have proof of the date that you mailed the rent check. You also have proof of the day the landlord received the check.
If you are using USPS online tracking, make sure to print the delivery and receipt tracking results for your tax records, because that tracking information disappears from the postal service records long before you would need it for the IRS.
That’s it. Stay tuned till next week, or to be sure to get these quick strategies, send me your email address.