COVID-19 changed everything, including taxes. But it didn't change the importance of having a robust end-of-year tax planning checklist. In fact, it's more important than ever for you to have an end of year tax planning checklist. Considering all of the legislative changes and modifications, your end of the year tax planning checklist can be the difference between you having to pay taxes vs getting a much-needed refund.
Fortunately, you're not alone! The experienced team at John F. Dennehy can help you navigate tax planning this year and every year. We've made it our business to stay up to date on all CARES Act and COVID-19 relief legislation and how it can impact your tax strategy. Let's take a closer look at a few of the top end of year COVID-19 tax planning strategies you should have on your checklist.
Do You Understand How PPP Loans Are Taxed?
The Coronavirus Aid, Relief and Economic Security (CARES) Act created the PPP or Paycheck Protection Program. This sweeping legislation authorized small business loans to help owners cover employee salaries and other eligible business expenses. As long as a few qualifying conditions are met, you may be able to have your PPP loansforgiven, which would make them not taxable.
Although this is true, the holistic tax picture is much more complicated. This is because the IRS has explained that otherwise deductible expenses, including payroll costs, are not tax-deductible if they have been funded with proceeds from a PPP loan.
And this can create a conundrum for business owners who may not expect taxable income. Make sure to work with your tax planning professional for tailored guidance on all issues that may arise from PPP loans.
Have You Considered When to Pay Back Payroll Taxes?
Among other things, the CARES Act allows small business owners to defer paying their 6.2% of Social Security payroll taxes that were incurred from Marcy 27 through the end of the 2020. While the deferment exists, it's important to understand that half of the funds must be paid by December 31, 2021.
And the remaining half of the deferred funds must be paid by December 31, 2022. As a result, now is the perfect time to work with your tax advisor about a strategy to pay this liability.
Are You Using Net Operating Losses Properly?
The CARES Act resurrected a previous provision that allowed businesses to utilize current losses against previous income to generate immediate refunds. Net operating losses (NOLs) from 2018, 2019, and 2020 could be carried back up to five years to generate refunds against previous taxes. You may be able to use these losses to offset income earned at the higher tax rate prior to 2018. Work with your accountant to explore whether this strategy would be beneficial for your business.
Will Your Business Qualify for Different Treatment?
Many small businesses may be able to deduct 20% of their qualified business income. This deduction typically applies to pass-through income or when you pay taxes on business income personally instead of the business paying taxes on it. However, the law does limit this deduction to particular business services.
For 2020, business owners of accounting practices, medical practices, and legal firms can see less of a deduction if the taxable income is more than $326,600 for filing jointly. If your income exceeds $426,000 for joint filers, you're not eligible for the deduction.
Looking forward to 2021, you may want to consider changing your business status to a C-corporation from a pass-through business in spite of the 20% deduction. Although pass-through entities may still have benefits, the 2017 Tax Cuts and Jobs Act lowered income tax rates for all C-corps from 35% to 21%.
Whether you should make the switch should be based on a thorough analysis and careful consideration. Reach out to John F. Dennehy for personalized guidance on whether it would make sense for your business to change filing status.
Have You Maximized Deductions?
Now is the perfect time to spend money on items that your business needs! In doing so, you'll meet a business need and work toward maximizing deductions. Does your business equipment need to be upgraded?
Are there any vendor payments that you may be able to make in advance? Can I load up on office supplies? Create a list of all of the purchases you may be able to make to maximize your deductions.
Equipping Your Business for Success
Specifically, if you purchase new or used equipment for your company and begin to use it before the end of the year, you may be eligible for a federal tax deduction of up to $1.04 million. Considering these deductions are designed for small businesses, they begin to incrementally decrease at $2.5 million.
At the same time, you may be able to utilize bonus depreciation deduction on certain types of equipment. Work with your tax planning professional to learn more about this strategy.
Contact John F. Dennehy
As a small business owner during COVID-19, you have a lot on your plate. In addition to finding unique ways to keep the lights on and doors open, you need to ensure all of the boxes are checked on your federal and local taxes.
However, you don't have to do it all. The experienced team of tax planning professionals at John F. Dennehy can and will help. We work with business owners across all sectors and specialize in helping you minimize tax liability and maximize your return.
Contact John F. Dennehy CPA today to learn how we can help you achieve your tax planning and business goals.