2020 has been a tumultuous year for taxpayers across the country, especially for those who own a business. If you’re fearful for the 2021 tax season, you’re not alone. As you prepare for tax changes, recoup profits, and accept losses, you may want to take extra care in planning ahead. Here are a few things to plan for and ways you can budget in preparation for the 2021 tax season.
Control your tax future.
We all know about basic tax deductions, but consider certain deductions where decisions can be made. For example, asset purchases can often be depreciated right away or more slowly over time. If you need additional equipment or software to run your business, be sure to get it in place by December 31st in order to take a full tax deduction this year. Remember, buying larger assets strictly for the tax deduction is not a great idea! Only buy assets that will positively impact your bottom line, taxes are just one of many variables in the decision making process.
If your entity is an S Corp or LLC, be sure to maximize your Qualified Business Income Deduction (QBID). There is a balancing act between W-2 wages and taxable income, so this needs to be reviewed prior to year-end in case any adjustments are needed.
If you received Paycheck Protection Program (PPP) funds be sure to consider tax implications under the current IRS interpretations. Check with your tax professional on when you should apply for forgiveness.
Here are a few more ideas to reduce taxes: If you are a cash basis entity, write a few extra checks in December instead of waiting until January. If you own a building, look into a cost segregation which may allow for greatly accelerated depreciation on parts of the building. If you develop products or processes, the R&D credit may be a good fit for you. This credit is often neglected by those who incorrectly assume they would not qualify!
Review Your Entity Structure
Now is a great time of year to review your entity structure to ensure you’re taking advantage of the rules that best fit your specific needs. For example, are you a C Corp because that’s just how it’s always been done? Consider an “S Election” to take advantage of one layer of tax and qualified business deductions. Is your business paying taxes on the cash or accrual basis? Switching to the correct basis may result in a substantial deferral in tax liabilities. Consider entity structuring as a way to hold different assets and offer more benefits.
Invest in Your Staff
Investing in your staff is a great way to boost employee morale during this challenging time while also reducing your tax burden. Consider additional 401K contributions if your plan allows for them, year-end bonuses, additional healthcare benefits or contributions or a “health fund reimbursement” for employee gym memberships, sport activities, healthy activities, etc. Accrual basis corporations can pay bonuses to non-owners up until 03/15/21 and still count towards 2020 deductions.
Have an Emergency Fund
While it’s late in the year, the tax planning season is just starting. It’s never too late to put something towards an emergency fund, even as the fiscal year comes to a close. If budgeting has been particularly difficult during this time, talk to a consultant. Tax and financial advisors are great when it comes to exploring options you may not have thought of on your own. In the meantime, save everything you can and be extra prudent in spending!
This particular tax season may be worrisome for most small businesses, but the process is a lot less terrifying when experts are just a click away. Our accountants at Fates, Bodily, and Parker are well versed in business needs, and are always willing to help with budgeting to determine how much of an emergency fund you should have available. Our commitment to giving you the best financial advice is evident in our transparency, and proactive contacts. Our goal is to make sure you and your business feel less alone this season.
Don’t be caught off guard this tax season, give us a call!