Filing your business’s taxes can sometimes feel like a necessary evil, making tax season a very stressful time for a small business owner. Each year, you may ask yourself: “Am I paying too much?” “Have I taken advantage of all the deductions available to me?” “What tax credits apply to my business?” When you’re not a tax expert, it can be tough to determine the answer to these critical tax questions on your own.
Detailed below, we discuss what tax changes you need to know about this year as a small business owner and which small business credits you could be taking advantage of.
10 Tax Changes to Know in 2021
Still on the heels of dealing with the major tax reforms incited by the Tax Cuts and Jobs Act that went into effect in 2018, many business owners are wondering what tax code updates they can expect when filing their 2020 business tax return. And because of COVID-19, there were many notable changes for 2020, as well.
Small business owners should keep in mind a number of changes when working with their tax accountants:
- Forgiven Paycheck Protection Program (PPP) loans will not be included in taxable income and are completely tax-exempt. Deductible expenses like payroll, rent, and utilities that have been paid for using funds from a PPP loan can be written off like business expenses under normal circumstances.
- Form 1099-MISC has been redesigned, and form 1099-NEC for reporting nonemployee compensation has been reintroduced for tax year 2020.
- Employee retention credits are available in 2020, even if you received a PPP loan and your business had a 50% reduction in quarterly revenue compared with the same quarter in 2019.
- Employers that deferred payroll taxes on behalf of their employees can now withhold and pay the deferred taxes throughout 2021 instead of just within the first 4 months of the year.
- Net operating losses (NOLs) can now be carried forward at 100% instead of 80%.
- There is now a $300 above-the-line charitable contribution deduction for individuals who use the standard deduction and do not itemize deductions. For corporations, the taxable income limit has been increased from 10% to 25% when it comes to charitable contributions.
- Qualified improvement property is now eligible for bonus depreciation and a 15-year life instead of 39 years.
- Retirement plan rules have been loosened as per the Setting Every Community Up for Retirement Enhancement (SECURE) Act, including the following:
- The required minimum distribution moved from 70.5 to 72 years old.
- There is no required minimum distribution in 2020.
- If the individual retirement account (IRA) owner dies, beneficiaries can extend distributions over 10 years.
- Now any age can make IRA contributions (formerly, this was capped at age 70.5).
- The small employer credit for setting up a qualified retirement plan increased.
- A new credit is available for employers that set up automatic employee enrollment.
- The nonresident (1040-NR) form was redesigned to match up with the 1040 return.
- The Families First Coronavirus Response Act provides small and midsize employers with refundable tax credits that reimburse them, dollar for dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.
This outline of tax law updates is by no means exhaustive; as such, we encourage you to use this list to kick off a conversation with your preferred tax expert to make sure you have taken into account all tax updates that apply to your specific industry, business, and tax return.
10 Small Business Credits to Know
In addition to making annual tax planning part of your normal business planning process, there are a variety of ways business owners and founders can save money come tax season, and they come in the form of business tax credits. Following are 10 tax credits to consider, but again, working with your accountant in the long term will help you uncover and proactively pursue tax credits as part of a holistic annual tax strategy.
- The General Business Tax Credit or the total value of all singular credits can be applied against your tax return.
- The Research & Development Tax Credit provides for a federal and/or state credit to deduct up to 20% of qualified research expenditures for certain industries.
- Credit for small employer health insurance premiums. If you’re providing for your employees’ health benefits, you can receive a credit.
- Credit for paid family leave. The Internal Revenue Code Section 45S provides a tax credit for employers that provide paid family and medical leave to their employees as a percentage of their wages while they are on their leave.
- Credits for alternative-fuel and alternative motor vehicles. For example, in Colorado, if you purchased a light-duty truck that is an alternative-fuel vehicle, you can receive a credit of $5,500 for the 2020 tax year.
- The Disabled Access Credit provides a credit for businesses that did not exceed $1 million in gross receipts or had fewer than 30 employees who incurred expenses to comply with the Americans with Disabilities Act of 1990.
- The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring employees who face barriers to employment, like ex-felons or veterans.
- The small employer pension plan start-up credit provides up to $5,000 for 3 years to reduce the cost of setting up a simplified employee pension plan (SEP), a savings incentive match plan for employees (SIMPLE) IRA, or a 401(k) program.
- The Empowerment Zone Credit allows employers of employees who live in certain urban and rural areas to receive a percentage of those employees’ income as a credit.
- Opportunity zone credits reduce capital gains taxes for businesses that invest in qualified opportunity zones. For example, if you purchase a business in an opportunity zone, you may be eligible to receive a credit.
Absolutely no one wants to pay more in taxes to the Internal Revenue Service (IRS) than they have to! We all know that the more cash you can keep in your business, the more you can invest into valuable objectives that help your business grow. Though filing your annual tax return and cutting a check to cover your tax obligations can feel like a lot to take, in addition to running your business, it doesn’t have to be. With the help of many of the above opportunities and a real (and an ongoing) conversation with your tax accountant, you can be sure that you aren’t paying too much in taxes and that you’ve taken advantage of every available opportunity for your business.
Lorne Noble is Cofounder and CEO of Simple Startup.