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Hi everyone,
This is a long post, so if you don't have patience for all that, my basic question is: how can a cash basis taxpayer correct for receiving other year's income in one tax year creating a big spike in income and a higher tax bracket?
BACKGROUND
I'm a sole proprietor LLC with a fledgling custom woodwork business -- cash basis taxpayer, no employees. Since starting about 6 years ago, annual Sched C profits have been meager to say the least (especially since I'm in NYC). My dilemma is that several factors added up to having a spike in income and some delays in paying 2019 expenses pushing me into a higher tax bracket. Is it too late to file as accrual basis tax payer? Any other options?
Sched C Income:
2017 -- $52,000
2018 -- $32,000
2019 -- $132,000
(actually $60-$70k earned each year)
QUESTIONS
I have myself to blame for not keeping up with the bookkeeping and realizing the situation BEFORE 2020 arrived. But my question is this: what strategies are available to someone in my situation to reduce the tax burden when there is a spike in income such as this? Either now that's its after the tax year has ended, or before if I had caught this in November 2019?
For example, it would not be helpful to send $30k in anticipated rent increases to the landlord during 2019 when we are still negotiating a new lease and haggling over the monthly rent. But could I have put the anticipated 2019 rent increases in escrow or set up a multi-member LLC and paid that LLC to hold it for me so as to expense those payments in 2019? I just this week sent $24k to the landlord for retroactive July-January rent increases now that we have a new lease in place.
If I were an accrual basis tax payer this would help with the deferred 2017-2018 income received last year and the deferred 2019 expenses I assume. Should I (can I?) file to change to accrual basis for 2019 and then change back to cash basis after 2020 (accrual bookkeeping is going to be a challenge)?
I see that I could have set up an IRA before the end of the year. I'm not sure investing in the stock market at this time would be a wise move given the coronavirus situation. But I understand setting up an SEP-IRA and funding it before my tax deadline of April 15th, 2020 is an option? Can one have an SEP-IRA which is in a simple interest bearing account instead of investments? Unfortunately aside from the jittery stock market, I'm saving money to expand the shop with the next lease renewal, so this may not be helpful.
I know another shop where their accountant recommended they make a big purchase before year's end, so they bought a box truck. I don't need to make any big purchases, but was that really my only option, or if I find myself in this situation again as a cash basis tax payer?
Cheers, and thanks in advance!
This is a long post, so if you don't have patience for all that, my basic question is: how can a cash basis taxpayer correct for receiving other year's income in one tax year creating a big spike in income and a higher tax bracket?
BACKGROUND
I'm a sole proprietor LLC with a fledgling custom woodwork business -- cash basis taxpayer, no employees. Since starting about 6 years ago, annual Sched C profits have been meager to say the least (especially since I'm in NYC). My dilemma is that several factors added up to having a spike in income and some delays in paying 2019 expenses pushing me into a higher tax bracket. Is it too late to file as accrual basis tax payer? Any other options?
- In 2019 I received (finally) payments for two big projects completed during 2017 and 2018 totaling $72,000.
- Due to ongoing negotiations on a new lease, an increase in rent for half of 2019 is only getting billed to me now totaling $24,000, and they will be sending me a bill (late) for 2019 property taxes totaling another $5k easily. So that's $30k in 2019 expenses not paid until 2020.
- Luckily I was owed payments from a client totaling $40,000 I was able to request delayed until Jan 2020 or this would have been uglier.
Sched C Income:
2017 -- $52,000
2018 -- $32,000
2019 -- $132,000
(actually $60-$70k earned each year)
QUESTIONS
I have myself to blame for not keeping up with the bookkeeping and realizing the situation BEFORE 2020 arrived. But my question is this: what strategies are available to someone in my situation to reduce the tax burden when there is a spike in income such as this? Either now that's its after the tax year has ended, or before if I had caught this in November 2019?
For example, it would not be helpful to send $30k in anticipated rent increases to the landlord during 2019 when we are still negotiating a new lease and haggling over the monthly rent. But could I have put the anticipated 2019 rent increases in escrow or set up a multi-member LLC and paid that LLC to hold it for me so as to expense those payments in 2019? I just this week sent $24k to the landlord for retroactive July-January rent increases now that we have a new lease in place.
If I were an accrual basis tax payer this would help with the deferred 2017-2018 income received last year and the deferred 2019 expenses I assume. Should I (can I?) file to change to accrual basis for 2019 and then change back to cash basis after 2020 (accrual bookkeeping is going to be a challenge)?
I see that I could have set up an IRA before the end of the year. I'm not sure investing in the stock market at this time would be a wise move given the coronavirus situation. But I understand setting up an SEP-IRA and funding it before my tax deadline of April 15th, 2020 is an option? Can one have an SEP-IRA which is in a simple interest bearing account instead of investments? Unfortunately aside from the jittery stock market, I'm saving money to expand the shop with the next lease renewal, so this may not be helpful.
I know another shop where their accountant recommended they make a big purchase before year's end, so they bought a box truck. I don't need to make any big purchases, but was that really my only option, or if I find myself in this situation again as a cash basis tax payer?
Cheers, and thanks in advance!