Tax Planning Tips for Small Businesses

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Tax Planning – Looking Ahead

It’s always a good idea to periodically reevaluate your company’s tax liability. Especially with the tax implications of the Coronavirus Aid, Relief and Economic Security (CARES) Act for small business owners. Additionally, the Tax Cuts and Jobs Act will change the way business income is calculated as well as the deductions you can take, etc. Be sure to work with your tax advisor to factor these changes into your tax strategy for the 2020 tax year and into the future.

The Merrill Lynch wealth management and financial services company identifies tax topics you can explore with your tax advisor as follows:

Does Your Business Qualify for Different Tax Treatment?

The article states that many small business owners can deduct 20 percent of qualified business income in calculating their federal taxes. The article goes on to caution that this is not an automatic deduction and generally applies to income “pass-throughs” (when owners pay taxes on business income themselves, rather than the business itself paying tax). However, the law limits the deduction for certain service businesses. For the 2020 tax year, owners of businesses such as legal, medical, or accounting practices begin to see a reduced deduction if their taxable income surpasses $326,600 for joint filers ($163,300 for all other filers). Owners of service businesses with taxable income in excess of $426,600 for joint filers ($213,300 for all other filers) get no deduction.

Talk with your Bookkeeping and Accounting Service tax advisor or tax specialist and see if they can help you identify areas where you can take advantage of this deduction.

Other Areas to Review

Ask your tax specialist to help you determine whether it will be better for you to pay quarterly estimated taxes or if you should put money aside, or arrange for a line of credit to pay the Internal Revenue Service.

Retirement savings plan – Add to an existing plan or set one up to take advantage of this tax deduction for yourself and your employees. You may qualify for a tax credit when setting up certain plans.

Larger deductions for equipment – If you buy new or used equipment for your company and place it in service before the end of the year, you could be entitled to a federal tax deduction of up to $1.04 million.

Charitable deductions – Be sure to review your giving strategy with your tax specialist as The Tax Cuts and Jobs Act capped personal itemized deductions for state and local taxes.

PPP Loans – Consult with your tax advisor about this and other important tax issues raised by PPP loans. The CARES Act allowed businesses to defer a 6.2 percent share of Social Security payroll taxes incurred between March 27, 2020, and the end of 2020. Half of the deferred funds will have to be repaid in 2021, and the other half of the deferred funds will be due by the end of 2022. Talk to your tax advisor and plan for this liability.

2020 was a tough year for small businesses and your tax advisor will be able to help you access and plan your tax year in a way that takes advantage of the government incentives brought on by the CARES Act and the Tax Cuts and Jobs Act.

EVA Business Solutions love to help our clients build profitable businesses and keep them running smoothly! We are a virtual bookkeeping and accounting service ready to assist you with all of your bookkeeping, financial and tax planning, and accounting needs. Call us today at (615) 461-7157.

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