5 Things You Absolutely Must Chat With Your Tax Accountant About
Small business owners are always looking for ways to minimize their tax liability, but this year more than ever, your conversation with your tax accountant is critical. Your tax accountant has a full grasp of the tax implications of the Coronavirus Aid, Relief, and Economic Security (CARES) Act for small business owners. Plus, they will have a greater understanding of how the Tax Cuts and Jobs Act will affect how you calculate your business income, the deductions you take, plus much more.
When you work with your tax advisor, you will want to consider possible additional changes in the coming months - and consider what other additional deductions could help you in the 2020 tax year and potentially into the future.
5 Items to Discuss with Your Tax Accountant
1. Learn how PPP loans will be taxed
The CARES Act founded the Paycheck Protection Program (PPP), which authorized SBA loans to cover employee salaries and other specified expenses. Assuming certain conditions are met, small businesses can apply to have those loans forgiven. Many people think forgiven PPP loans are not taxable; while that's true, the full tax picture is far more complicated. Your tax accountant might discover taxable income that you're not expecting. Ask about this and other important tax issues raised by PPP loans.
2. Discuss when to pay back payroll taxes
The CARES Act allowed small businesses to defer paying their share (6.2%) of Social Security payroll taxes incurred between March 27, 2020, and the end of 2020. However, half of the fund deferred need to be paid by December 31, 2021, with the other half of the deferred fund paid by December 31, 2022. Making now the time to talk with your tax accountant about a plan to pay for this liability, as they may have other suggestions on how to pay back what you’ve deferred.
3. Make the best of 2020 losses
2020 was a challenging year for most small businesses; if you struggled as well, there might be a silver lining. Thanks to the CARES Act, individual small businesses can apply for a net operating loss generated in 2018, 2019, 2020 or income from the past five years for a potential refund. The rule change could be an incentive to take steps to increase your losses in 2020 by incurring additional expenses. You will have to amend past returns or carry your losses forward for future tax years, which is another reason to speak to your tax accountant.
4. determine whether or not you qualify for different tax treatment
Most small business owners can deduct 20% of qualified business income in calculating their federal taxes; however, this isn't automatic. The deduction usually applies to income from pass-throughs (when the owner pays taxes on the business rather than the company paying taxes). The law limits the deduction for specified service businesses, but for the 2020 tax year, industries such as legal, medical, or accounting practices can see reduced deductions.
Looking ahead to 2021, you may want to consider changing from a pass-through business to a C-corporation. While pass-throughs may have some advantages, the 2017 Tax Cuts and Jobs Act reduced income tax rates from 35% to 21% for all C-corps. Your tax accountant can help you understand whether or not a switch is right for you.
5. Defer expenses and accelerate income
If your small business operates on a cash basis for tax purposes and your 2020 profit is low but you expect your business to be more profitable in 2021, consider accelerating cash collection before December 31 and delay deductible expenses until after the new year to help bring in more income. To defer deductions, you could pay staff bonuses in January instead of December.
If you expect higher profits in 2020, you may want to defer revenue during the last part of the year as a way of reducing your 2020 taxable income and move up deductions by paying some 2021 costs in advance.
As a small business owner, it's easy to get so busy in day-to-day operations that you don't take the time to plan for the big picture. However, this year more than ever, make time to meet with your tax accountant and discuss these items and others as this is an excellent step towards a healthier 2021.
We are not a CPA firm and not providing tax advice.
We recommend speaking with your Tax Accountant to discuss what options are available for your company.
