The IRS can (and will) impose hefty fines and fees on those who try to skirt the law, but it's possible to be smarter about how you file to get the best return possible. Here are just a few of the ways savvy small business owners are making the most of a tricky situation.
Note: This is not tax advice. Always consult your tax professional with questions.
Changes in small business tax law
A lot has happened in a year. With many businesses just figuring out the impact of the Tax Cuts and Jobs Act
, there is new legislation to contend with. The CARES Act
, for example, lays out a host of relief options for small businesses, including delayed payments of some payroll taxes.
The biggest questions surrounding the law involve how each type of relief will be taxed. Whether you received Paycheck Protection Plan (PPP) funding or a standard disaster relief loan, your tax deduction strategy may be considerably different than last year.
While tax preparation pros are still unraveling the unknowns, one major concern is how the IRS will treat PPP funds. The IRS originally stated that this money won't be taxed as income, and they clarified rules aimed at preventing "double-dipping
." Any expenses associated with forgiven PPP funds aren't deductible, so if your PPP funds weren't forgiven, then you may still claim those expenses.
Best 10 small business tax tricks
Depending on your business’s tax structure, your mileage will vary for each of these strategies. An S-Corp, for example, won't have the same paperwork as a sole proprietor, but they should both seek out as many tax breaks as possible. Most, if not all, of the following can be used in small business tax situations – regardless of business entity structure.
1. Max out retirement
This is no time to slow down on building your nest egg, and salaried employees of their own companies can benefit from boosting retirement funds and lowering taxes. The same goes for kicking in extra for your employees, a perk that they will surely appreciate.
Remember, you can offset 2020 earnings with retirement contributions all the way up to April 2021 for many types of plans. (Ask your tax consultant for details.) Use these first quarter months to figure your tax liability and shift more savings for the future.
2. Look at benefits vs raises
If you want to save on employer payroll taxes, a valuable employee perk
may be the better way forward. The IRS has a guide
on what's taxable and what's not, but some of the benefits that your employees won't pay taxes on include:
- Company cell phone
- Up to $50,000 in life insurance coverage
- Some employee meals
- Occasional tickets to sporting or music events
Note that the IRS considers gift cards (even small ones) taxable as income. If you want to avoid additional tax burdens, giving a small birthday gift like a fruit basket may offer tax savings.
Anything considered a de minimis benefit (too trivial or minor to merit consideration) carries no tax burden. Ask your tax professional how additional benefits, like tuition assistance or retirement planning services, can count as expenses during tax time without triggering additional payroll or income tax liability for you and your workers.
3. Consider charitable contributions
The year 2020 left many in a bad place financially, and there’s no shortage of charities looking for funds. If you’re thinking about making a charitable donation, you can consider it as a win-win-win.
In addition to helping a charity in need, it’s a tax reduction strategy that can help your bottom line and also build your brand rep. This strategy works best for those who don't take the standard deduction since those filers are limited to $300 "above the line" cash contributions
to approved charities and nonprofits. Talk to your tax consultant about what makes sense for your size of business.
4. Take advantage of qualified business income deductions
After the Tax Cuts and Jobs Act was passed, the IRS allowed for some business entities to deduct up to 20% of qualified business income
, as well as 20% for qualified real estate investment trusts (REITs). This may offer substantial savings when taken in addition to itemized deductions or the standard deduction.
Most sole proprietors, partnerships, and S-corps – and some estates and trusts – qualify for this, but some business services are excluded. The IRS has the full list available
5. Consider hiring family
Do you own a sole proprietorship or a partnership where two parents are owners? If your minor children are old enough to contribute to your business, this business tax reduction tip could save you the most – while keeping more money in the family.
You’ll need to legitimately employ your kids
, which includes W-2s and setting them up for any state taxes. Once hired, you can pay them standard wages without giving up money for FICA and FUTA, though federal and state income taxes still apply.
6. Review Section 179
Have you looked through those business equipment expense depreciation charts
? If you use the Section 179 lump sum method
, you can take the full value of the expense now. Purchases must be taken in the year they were made, and the total can't exceed $500,000. For most businesses, this covers a wide range of purchases and gets you the most benefit at once. Compare this tactic to the calculated phase-out method to make sure it works for you, and don't forget to file Form 4562
to claim your lump-sum benefit.
7. Don't forget transportation costs
Transportation may be the most overlooked small business tax trick. What worked for you last year may not offer the biggest savings this year, so don't pick a straight expense deduction over mileage calculation until you've estimated them both. Many companies will also have canceled flights and car rentals purchased last year that were refunded in 2020, so be sure to add those back in as credits. If there were non-refundable losses, factor that in, too.
Also, remember that company cars and associated expenses count as deductions; see the IRS fringe benefits guidelines
for how to treat personal miles used with a company vehicle.
8. Upgrade your receipt game
You don’t have to back every purchase with a physical receipt to consider it a legitimate business expense; see the IRS’s expensing rules
for examples. Documenting them provides you with better protection in an audit, though, and keeping these records reduces the chance you'll miss an expense come tax time.
Consider using scanning software with smart AI technology like the HP Smart App
, because it can provide a second look at expenses you may have missed the first time around. These high-tech tools also make categorization much easier when it’s time to file.
9. Defer payroll taxes, if it makes sense
The CARES Act gives businesses and sole proprietors some much-needed leeway on payroll taxes this year, specifically the 6.2% employer share
of Social Security from March 27, 2020, to Dec. 31, 2020. You can choose to pay half of this by Dec. 31, 2021, and the other half on Dec. 31, 2022, but not every company will want to kick that expense down the road. Ask your consultant how deferring fits into your bigger plans.
10. Double-check with tax software
Even if you don't file your own taxes, registering for an online tax software account is one of the most effective small business end-of-year tax tips. Enterprise-level products can get expensive, but it's often free to calculate your tax liability with online tax preparers. This gives you a glimpse of your situation long before you head into the tax pro’s office in February, March, or April.
These "previews" can help you make last-minute decisions, such as purchasing equipment or stashing more into your retirement account, when they can still impact your tax bill. Those who took advantage of PPP loans will especially benefit from estimating their tax liability early.
Looking ahead to 2021
While new COVID-19 aid packages remain up in the air as of this writing (January 2021), there may be additional tax relief for small businesses. No matter what happens, however, you can get a head start on tax savings with these tips.
If you had an especially difficult year due to COVID-19 obstacles, you could always take the full value of your losses this year. Past years were subject to a $250,000 cap on losses for single filers and $500,000 for joint filers, with any additional required to be carried over to the next year. The CARES Act gets rid of this limit for 2018, 2019, and 2020
, so if you need it, take it.
What happens if you finalize your figures and you can't pay? If you find yourself coming up short when the tax bill is due, carefully weigh any late payment penalties or interest against the cost of taking out a loan or putting your payments on a credit card.
Consult with your tax professional to help you decide how tax payments will affect cash flow and give you the best plan for success.