The 2021 tax season will be unlike any other given the unprecedented health and economic impact resulting from the coronavirus pandemic. This year, it will be more important than ever to be prepared for tax season. Here are some helpful tips to ensure your small business is successful for the 2021 tax season.
Tip #1: Determine How CARES Act Relief Provisions Might Impact Your Tax Obligations
Paycheck Protection Program (PPP)
The Coronavirus Aid, Relief and Economic Security (CARES) Act was issued in March 2020 to provide financial assistance to businesses negatively impacted by the pandemic.
The Payroll Protection Program (PPP) was introduced to provide forgivable loans to small businesses experiencing financial distress.
Ordinarily, forgiven loans would be considered taxable income. However, it is important to note that forgiven PPP loans are not considered taxable income to small businesses. Additionally, qualified expenses paid with PPP loans are still eligible as deductible expenses on the business’ tax return.
Payroll Tax Deferral
The CARES Act introduced a provision allowing businesses to delay paying the employer portion (6.2%) of Social Security taxes incurred between March 27, 2020, and December 31, 2020. The provision will allow taxpayers to remit the first half of the tax liability no later than December 31, 2021, with the remaining balance due by December 31, 2022.
Tip #2: Pay Attention to Those Losses
The pandemic brought hardship to many small businesses in 2020, resulting in net losses, which can be tough for any business. While this is not what we hope for when we open our doors, there is a bright side.
Per guidance outlined in the CARES Act, eligible small businesses will be able to use any losses generated in tax years 2018, 2019, and 2020 and apply them to taxable income generated in the previous five tax years. This would result in an immediate refund for the taxpayer. Alternatively, you can carry the losses forward to future tax years. Consult your tax advisor to determine which option would be best for you.
Tip #3: Set Up or Add to a Retirement Savings Plan
It is never too early to save for retirement. If you are a small business owner and have not established a retirement plan, now may be the time to do so. Many types of plans allow you to make contributions to your retirement plan through the deadline for filing the 2020 small business tax return.
By starting or continuing your retirement contributions, you will be able to reduce your taxable income and allow your savings to grow tax-free.
Tip #4: Determine Your Eligibility
The Tax Cuts and Jobs Act included legislation that allows certain small businesses to deduct up to 20% of qualified business income on your small business tax filing referred to as the Section 199A deduction.
Most businesses that are partnerships, S corporations, and sole proprietorships will qualify for the deduction. Your tax advisor would be able to work with you to understand the qualifications of the business deduction and your eligibility.
Tip #5: Review Your Expenses
Now is the time to review your receipts and other financial records to begin identifying deductible expenses, depreciable assets, and those which may qualify as Section 179 expenses.
Under the rules of Section 179, you may take the full value of the expense for certain business equipment in the current year. This can provide significant tax savings and help to streamline recordkeeping.
The 2021 tax season is destined to be one unlike any other.
If you have further questions about Small Business 2021 tax tips, please contact DMJ.