Accounting strategies that can help reduce a tax burden are welcomed by all small business owners, and while the following tips are all viable, you’d be wise to discuss them in detail with your tax advisor, as naturally, each business has its own unique requirements:
Discuss possible equipment deductions with your tax professional:
For new or used equipment for your business that’s placed into service before the year ends, you could be entitled to a federal tax deduction of up to $1.04 million. Additionally, depending upon the type of equipment bought and when it’s being used, small businesses may be able to take a 100% deprivation deduction.
Aside from helping your business to become socially responsible, contributing to charity can also provide you with a tax deduction, which is typically equal to the fair market value of whatever has been donated. Review this as a strategy with your tax advisor though, as the rules may be different for pass-through businesses.
Discuss PPP loans to understand how they will be taxed
Authorizing small businesses loans to help them pay employee salaries and other expenses, the Paycheck Protection Program was created by The CARES Act, and some businesses may now be able to request for them to be forgiven. While PPP loans are free from tax, the same may not apply for some expenses funded by a PPP loan, however, and only a discussion with your chosen tax professional will help you ascertain which rules apply to you and your business.
Think about when to pay back payroll taxes
Of course, you don’t need to think about this, but your tax professional will certainly need to. Allowing businesses to defer paying their 6.2% share of Social Security payroll taxes incurred between March 27th 2020 and the end of 2020, The CARES Act helped out many businesses in a big way, but half of those deferred funds must be paid back by the end of December 2021, with the remaining half due by the end of December 2022. Devising a strategy for paying these back is vital if you want to plan your taxes and outgoings more effectively.
Lost out this year? Make the most of it
Many small businesses struggled in 2020 (and continue to do so), but there may be light at the end of the tunnel for some. Some small businesses may be able to apply a net operating loss generated in 2018, 2019 or 2020 to income from the past five years to receive an instant refund, and while it may sound counter intuitive, your tax expert may even advise you to incur more expenses to increase your losses.
There really is no better time to consult with a tax professional, and if you’ve had a tough year due to the pandemic, doing so could help you have a more positive future by relieving some of your tax burden.