Tax Preparation for the End of the Year
Tax season is one of the most stressful times of the year for a small business. Tackling your taxes and staying in compliance is a never-ending maze, so it’s best to start preparing for tax season now, especially following the tumultuous presidential election and a catastrophic pandemic this year.
COVID-19 aid, CARES Act, and Tax Cuts and Jobs Act (TCJA) will affect deductions, tax rates, and rules for the 2020 tax season. Your small business will have to stay flexible during the coming months when it comes to tax preparation because things could change with the incoming administration and tax policy changes from Congress.
Here are some ways your small business can begin tax preparation for 2021:
Take Advantage of Bonus Depreciation
New and used machinery and equipment bought and implemented in 2020 qualify for a 100% bonus first year-depreciation deduction thanks to the TCJA. That means your small business could write off the whole cost of your asset additions on this year’s return. You should consider acquiring more assets before the end of the year, even if you only use them for a few days, to take full advantage.
Understand PPP Loan Taxes
The CARES Act started the Paycheck Protection Program (PPP) for small business loans with an interest rate of 1% to cover payroll, interest on mortgage payments, rent payments, and utility payments. If you abide by those conditions, the PPP loan can be forgiven entirely and is not taxable. However, this does not mean you don’t owe taxes for those loans. The expenses and payrolls that the loan covers are not tax-deductible, because that would result in double dipping.
Tax-Favorable Retirement Plans
Small business owners have options for employer-sponsored retirement savings plans including: SIMPLE-IRA, SEP-IRA, 401(k), and defined benefit pension plans. Each plan differs in how much the employee and employer can contribute, as well as investment opportunities. Contributions made by you and your employees are sometimes tax-deductible. Small businesses can also seek a tax credit as an incentive to start a retirement plan.
After such an unpredictable year, everyone is on edge about saving up and having a retirement plan. Setting up a retirement savings plan will not only give your employees peace of mind, it could also help your small business save money. The deadline for a SIMPLE-IRA has already passed, however the deadlines for setting up other plans like a SEP-IRA can be as late as October 2021.
Develop a plan to pay for taxes
Regardless of the changes in tax policies or rates, your small business will need to have enough money to pay taxes. This is where a cash flow projection comes in handy, it’ll tell you how much money you have on-hand, if you’ll be able to pay what you owe to the IRS, and if not, how much you’ll have to borrow to cover taxes.
If you find yourself struggling at the end of every year to cover what you owe in taxes, consider paying quarterly estimated taxes so you can spread out the burden rather than having it all hit at once.