This year has been a challenge for most small businesses due to the COVID-19 pandemic. Although the Paycheck Protection Program (PPP) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act both provided much-needed financial relief, they also complicated the tax landscape. In fact, many of the provisions under the CARES Act require action before 2021. That’s why tax planning is more important than ever. To ensure you’re taking advantage of the many overlooked tax deductions and credits available, check out these year-end tax tips for small business owners.
Easy Year-End Tax Tips
Use the Home Office Deduction
Thanks to the pandemic, many businesses moved to home operations in an effort to socially distance and limit exposure to the virus. If you’re one of the millions now working from home, you could be eligible for the home office deduction. There are three basic requirements you must meet to qualify:
- You must be self-employed or a business owner;
- Your home must be your principal place of business; and
- You must have a designated space that is used exclusively for business
To calculate your total tax deduction, you may use either the simplified method or actual expenses. With the simplified method, you’ll calculate based on the $5 IRS rate per square footage with a maximum of $1,500 allowed. If you use actual expenses, it’s a bit more cumbersome but you could receive a larger deduction. To learn more about allowable expenses, be sure to check out our Home Office Deduction Easy Guide.
Maximize Retirement Plan Contributions
Do you have an IRA or a simplified employee pension (SEP)? If you’re self-employed, maximize your contributions by December 31 to lower your taxable income on your 2020 tax return. You can contribute up to $6,000 (or $7,000 if your 50 or older) to your IRA. For a SEP, you cannot exceed 25% of your net earnings or $57,000, whichever is smaller.
Donate to Charity
Another way to reduce your taxable income is to donate to charity. Consider donating unused inventory, older furniture, clothes, toys, and cash. Just be sure to document everything and keep all receipts. It’s a great way to reduce your tax liability and help others.
Remove Obsolete Inventory
Do you have old or unused inventory? If you don’t donate it to charity and take the deduction, you could also give it away and deduct the original cost of the inventory as an expense on your tax return.
Other Year-End Tax Tips
Take Advantage of Section 179
If you’re thinking about purchasing new office equipment, furniture, vehicles, or even computer software, do it before the end of the year and take advantage of the Section 179 deduction. Under Section 179, you can deduct the full cost of your purchases on this year’s tax return instead of spreading it out over several years. To qualify, your asset must be:
- Tangible (buildings and land don’t qualify);
- Purchased (leased items are ineligible);
- Primarily used for business (more than 50%); and
- Acquired from an outside party (items purchased through a relative or businesses/organizations you have a relationship with are not eligible)
To claim the deduction (Form 4562) on your 2020 tax return, you’ll need to purchase and place the item into service before January 1, 2021.
Push Back Invoicing
An easy way to reduce your tax liability is to lower your income. If you’re a service-based business, consider pushing your December invoices to January, if feasible. Just remember that the additional income in January may put you into a higher tax bracket on your 2021 tax return. Before making a decision, speak with a tax professional to determine which will be more beneficial to you.
Reconsider Payroll Tax Deferment
Did you defer payment of your payroll taxes for 2020? Although this may have given you a financial cushion, it also means you no longer can deduct your share of payroll taxes until they are paid. If you need to reduce your tax liability, you may want to make the payment now instead of next year. Consult with an experienced tax advisor, like those at Tax Defense Network, who can help you weigh your options.
File Necessary Tax Forms
Although your 2020 income tax returns won’t be due until April 2021, several other important tax forms need to be filed before the end of the year.
- Form W-2, Wage and Tax Statement
- Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
- Form 941, Employer’s Quarterly Federal Tax Return
- Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
- Form 1096, Annual Summary and Transmittal of U.S. Information Returns
Keep in mind that these forms will only be required if you have employees or contract workers.
Hire a Tax Professional
This year, more than ever, it’s important to work with a licensed tax professional, like those at Tax Defense Network (TDN). At TDN, we can help determine if you are eligible for disaster relief and certain tax credits due to COVID-19. This may include allowable deductions under Revenue Code Section 139, as well as FFCRA (Families First Coronavirus Response Act) and the Employee Retention Credit – just to name a few. We can also help you navigate PPP loan forgiveness and take advantage of accelerated alternative minimum tax (AMT) refunds.
If you’d like help with your 2020 tax return, schedule a free consultation with one of our seasoned tax professionals today!