Small business owners are always looking for ways to minimize their tax liability. This year’s conversation with your tax accountant may be crucial, as tax professionals try to fully understand the tax deductions of the Coronavirus Aid Relief and Economic Security (CARES) Act for small businesses. Moreover, with the Tax Cuts and Jobs Act coming into play, you may be unsure how the new tax law will impact your tax bill as a small business owner.
As you work with your tax advisor from https://taxfyle.com/, be aware of the recent changes, along with additional changes that may emerge in the future. Here’s what you need to know in the 2020 tax year, and the strategies to help your business when making tax payments.
Determine whether your business qualifies for the different tax treatment.
You can deduct 20% of qualified business income when calculating your federal taxes. However, it’s not automatic. The deduction generally applies to income from “pass-through” – this is when business owners pay the taxes on business income, rather than the business itself paying taxes. However, there’s a limit to the deductions for individual service businesses.
For the tax year, 2020 business owners of legal companies, accounting, or medical practices will start to see a decreased deduction if their taxable income is above $163,300 and $326,600 for joint filers. In contrast, owners of service businesses with taxable income that surpasses $213,300 and $426,600 for joint filers get no deduction.
Going ahead in the year 2021, you may want to consider changing your business status from a pass-through business to a C corporation despite the 20% deduction. While having a “pass-through” may have certain advantages, the 2017 Tax Cuts and Jobs Act reduced income tax rates from 35% to 21% for all C corporations. Whether this change of status makes sense to you, this is something you can ask your tax specialist to help you understand.
Have a smart plan for paying your taxes.
The sooner you know about your small business’ general outlook for the tax year, the better prepared you’ll be, which will help prevent cash flow disruptions. You can do this by either putting some cash aside to pay your taxes or having a credit line to pay the IRS.
You can ask your accountant if you’re better off paying quarterly estimated taxes next year. This allows you to distribute your tax burden throughout the entire year, instead of looking for a large amount of cash to pay a large tax payment in April.
Understand how PPP loans will be taxed.
The CARES Act also created the Paycheck Protection Program (PPP), which gave small businesses loans to cover their salaries and other expenses. Assuming certain conditions are met, you can apply to have such loans forgiven. You may have heard that the forgiven PPP loans aren’t taxable. It’s true, but the full tax picture is way more complicated. The IRS states that otherwise deductible expenses, like payroll costs, aren’t tax-deductible if funded with the PPP loan proceeds.
To plan your tax payment, you may need to prepare for the taxable income you may not have planned for. It’s also advisable to discuss with your tax advisor to better understand tax issues that PPP loans may raise.
Consider when you’ll pay back payroll taxes.
When the CARES Act came into effect, it allowed small businesses to defer paying the 6.2% share of Social Security payroll taxes incurred during March 27, 2020, and the end of the year 2020. However, you should note that half of the deferred payment is expected to be paid by December 31, 2021, while the other half is expected to be cleared by December 31, 2022.
Take advantage of larger deductions for equipment.
If you purchase new or used equipment for your business and put it in service before the year ends, you could be entitled to a federal tax deduction of up to $1.04 million. Because these deductions are for small businesses, they start to phase it out at spending amounts from $2,590,000 and ending above $ 3,630,000.
Businesses can also take a 100% bonus depreciation deduction on specific equipment bought and put in service after September 27, 2017( up to 50%). The deduction also applies to purchases of specific equipment used and new equipment.
Contribute to charity.
Charitable contributions not only help you fulfill your goals as a socially responsible business owner and engage your staff in a meaningful activity, but it can also provide your business with a tax deduction. This is usually equivalent to the fair market value of the property donated. However, if you have a pass-through business, you should be aware that your ability to donate charitable goods made by the business may be limited in 2020.
The Tax Cuts and Jobs Act states that personal itemized deductions are for state and local taxes. The standard deduction for the year 2020 is $12,400 for individuals, and $24,800 for married couples filing together. If you wish to claim the standard deduction, you, therefore, can’t write off charitable gifts, though this year 2020, non-itemizers can deduct up to $300 in cash contributions to certain charities. Ensure that you review the given strategy with your tax advisor.
Make the most of this year’s losses.
2020 has been a tough year for most small businesses, but you may be able to find a positive thing, thanks to the CARES Act. Some small businesses are eligible to apply a net operating loss generated from 2018 to 2020, or income from the past five years through to 2020 for a potential immediate refund. This rule change may even be an incentive to take steps to increase losses incurred in 2020 by having more expenses. You’ll have the option to amend past returns, or even carry losses forward for future tax years.
If you don’t tell IRS what you’re doing on your 2020 tax returns, the losses will first be taken back to previous years. If you want to get your refund quickly, then file a tentative refund claim.