This past year, living through COVID-19 has been challenging for everyone. However, being a small business owner, you faced even more challenges fighting to keep your business running with all that COVID-19 entailed. For quite a while, figuring out how to service customers during lockdowns and trying to do your best for your employees while keeping everyone safe probably seemed like more than an additional full-time responsibility. Not to mention the overarching worries about health and safety.
Now that we’re settling into a new normal, it’s a good time to think about tax changes for 2021 and how they could impact your business. Careful consideration now could lessen your tax burden later when you could really appreciate the financial relief.
Five Things You Should Consider For Small Business Tax Relief
Tax experts say that to get the best results out of your tax planning, it would be something that you review continually, not just when they are due. This allows you to make the adjustments that can benefit you the most and makes sure you don’t miss out on a deduction because it’s too late to act.
Although 2018’s Tax Cuts and Jobs Act was the last significant change to the tax code, some additional programs were created to help businesses through COVID-19. Both the 2018 legislation and the COVID-19 programs should be considered when looking at your business’s tax situation. There are five major categories to explore that could have tax implications. (After reviewing them, consult your tax advisor for further guidance.)
1. PPP Loan Forgiveness and other financial assistance. If you took advantage of the first or second draw of the Payment Protection Program (PPP) loan program, make sure you understand what can be forgiven. If you used funds to cover eligible expenses, they could be excluded from your gross taxable income and forgiven. Expenses include:
- Payroll costs
- Business mortgage interest payments
Once you’ve used all of the proceeds, you can apply for forgiveness anytime up to the loan maturity date. Note: PPP borrowers now do not need to deduct the Economic Injury and Disaster Loan (EIDL) if they received the $10,000 advance payment. It is now considered a grant and tax-free.
Check with your PPP lender and tax advisor for more information on these and other assistance you may have received.
2. Check your business structure. The tax structure you used when you first started your business might be ready for an update that could provide significant tax savings. This move isn’t for everyone, but if you’re a sole proprietorship, partnership, LLC, or S corporation, you’ll find tax savings if you change to a C corporation. (Check with your tax advisor for more details.)
Are you a pass-through business? If you are considered a pass-through business, you may be eligible for a tax break of up to 20% on your business income. Up to 95% of small businesses are pass-through businesses that don’t pay taxes themselves but pass income and tax liability on to the owners. Depending on your financial picture, you could save a lot. Check with your tax advisor for more details.
3. Reduce your taxable income. This logical step addresses several different business aspects:
- Check your accounting method and time your income. Do you report profits when money is received or when an order is placed? When you report them can make a big difference for your taxable income. You may want to move the receiving of income from one year to the next to lower taxes.
- Write off bad debts. You can deduct them now and save on business income.
- Pre-pay some expenses. By paying them now, you can use the deduction this year unless you think you will need the deduction to lower your taxes next year.
4. Maximize itemized deductions. While an obvious part of reducing your taxable income, itemized deductions go deeper. Moves to consider include:
- Establishing or making deposits into a 401(k) or personal SEP (simplified employee pension) IRA
- Putting money aside for healthcare needs and lowering health insurance costs with a Health Savings Account (HSA)
- Making charitable contributions
- Making large capital expenditures now
5. Explore tax credits. While tax deductions reduce how much of your income is subject to income tax, tax credits give you a dollar-for-dollar reduction of what you owe. Make sure to get the benefit of both. Tax credits can include:
- Paying people on family leave or medical leave
- Providing access for disabled people
- Going green, including hybrid and plug-in vehicles
- Employer-provided childcare
- Work opportunities for those who may face issues with employment, and more
6. BONUS: Make a tax-paying plan. When you understand all the financial aspects of your business, it’s easy to plan and schedule your best tax moves. Your goal is actually not get a refund because it means you haven’t overpaid. Instead, you keep more money in your business. But to be able to do this, you must:
Make Sure Your Books Are Ready To Make Your Best Tax Moves
Tax preparation starts with an accurate financial picture of your business to help you make the right decisions. Keeping your books up-to-date is crucial for you and your tax advisor to be able to plan. But finding the time to do your books and run your business can be challenging. That’s why thousands of small business owners like Kaitlin Sinclair turn to us at Remote Books Online for best-in-class, affordable, professional bookkeeping help.
Kaitlin says, “We love using Remote Books Online. They make it so easy for us to stay organized and up-to-date with our books. As a new business, we started utilizing their services about a year into business, and they were able to organize everything and keep us moving forward!”
When you trust your books to Remote Books Online, you get:
- Catch-up, part-time or full-time bookkeeping help
- Your own certified and dedicated Quickbooks Pro bookkeeper and account team
- Secure, encrypted transactions
- The most trusted industry accounting software
- Your first month’s worth of catch-up prepared for free
Bookkeeping solutions start at $95 a month. It’s a cost-effective way to remove the frustrating, painful burden of bookkeeping from you or your staff and to make sure you’re ready to navigate 2021 tax changes with success.
Contact us so we can learn more about your business and needs and schedule your free month’s book catch-up. We look forward to helping you very soon.