8 year-end tax tips for small business owners during COVID

8 year-end tax tips for small business owners during COVID

8 year-end tax tips for small business owners during COVID

The end of the year is always an important period for tax planning, especially this year. The COVID-19 pandemic has brought historic destruction and challenges to small business owners.Although government legislation, such as Coronavirus Aid, Relief and Economic Security (CARES) Act, Provides a much-needed financial lifeline for small businesses, and many of its tax regulations will end before December 31, 2020 or require action.

Business owners need to act quickly. To help you navigate this complex environment, here are some key strategies, facts, and often overlooked tax reliefs that you need to pay attention to when you enter the year-end tax planning model.

1. Review your estimated tax amount to understand potential shortages

Many companies encountered cash flow problems in 2020 and underpaid estimated taxes. Doing so may result in penalties by the IRS and your state government. Review your estimated tax payment for the year and see if there is a shortage based on your expected year-end income. Use the Internal Revenue Service Form 2210, underpayment of estimated taxes by individuals, estates and trusts arrive Check if you have been fined for underpaid estimated taxes. If you do, please consult a tax professional to understand your options and determine whether you are eligible for an IRS exemption based on your circumstances.

2. Speed ​​up your AMT credit refund

The CARES Act includes a clause that speeds up when and how companies can apply for unused alternative minimum tax (AMT) credits.

The 2017 Tax and Employment Act abolished the AMT for future tax years, but allowed companies to apply for any unused AMT credits in the 2018, 2019, 2020, and 2021 tax years. However, the CARES Act speeds up the refund process, so you can now claim any remaining credits for the 2020 tax year. This money can then be reinjected into your business to help cash flow or cover operating expenses. To request a refund for any unused AMT credits (before the 2018 tax year), please submit an IRS Form 1139 or Form 1045 Until December 31, 2020.

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3. Discuss payroll tax deferrals related to COVID

Another benefit of the CARES Act is that it allows employers delay payment Their share of payroll taxes in 2020. Deferred payments must be paid before December 31, 2021, at which time 50% will be due and the remaining 50% will be due on December 31, 2022.

Although the extension is designed to provide much-needed liquidity for the rest of 2020, it also means that business owners cannot deduct their payroll tax share before paying payroll tax. This may not be a problem, but in an important conversation with a tax adviser, he may recommend that you pay your share of the payroll tax early so that you can claim the 2020 deduction.

Read more about Corporate Coronavirus Tax Relief And how these might affect your preparation for the 2020 tax year.

4. Run your business at home?Use the home office to deduct

If you run a small business outside of your home, you may overlook a common tax deduction.According to the U.S. Small Business Administration (SBA), before COVID, approximately 50% of companies are family-based. However, the IRS Report Deductions are often overlooked by small business owners.

If you are one of the millions of business owners, freelancers, and independent contractors who now work from home to stay safe and socially distancing, make sure you are familiar with the nuances of this deduction.

What is it Home office deduction? If you rent or own your house and use part of it for business, you can deduct business expenses related to your office space, such as rent, mortgage interest, property taxes, and utility expenses.

In order to encourage business owners to apply for deductions, the IRS provides two methods for calculating deductions—— Simplify options And conventional methods. The simplified option allows you to deduct $5 per square foot of a house used for business, up to a maximum deduction of $1,500. The conventional method takes more time and involves determining the cost of your home office based on the percentage of your home used for business.

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Now, there are some caveats.To apply for deduction, your home must be yours Main Business premises, you must use a certain area of ​​your home only business use. For example, if you work with a laptop on a kitchen table, but also use the space for family meal time, you cannot claim a deduction because you did not use the space “dedicated” as a home office. However, if you frequently use a separate room or office for business purposes only-be sure to declare this important deduction.

The tax season has not yet arrived, but you can now prepare for it by researching which expenses can be deducted, collecting annual household expenditure records and determining the best method for you (have a good conversation with your tax advisor). Please refer to the IRS guide-Commercial use of your home – Guidance on how to calculate and claim deductions.

5. Cancel your home office purchases

If you find yourself suddenly running your small business at home this year, then you may have spent some cash to equip it. If these costs are used exclusively for commercial purposes, many of these costs can be offset. This includes office furniture, computers, printers, office supplies, and even software licenses.In addition, if you drive to the store to buy these products, you can Deduct miles lead to.

If you need any office equipment or furniture, you may want to purchase them before the end of 2020, because you can use these purchases as tax deductions this year.

Now audit all your purchases in 2020 to get the required information before completing the IRS Form 4562 And attach it to your tax return.

6. Borrow funds, deduct interest

If your business receives financing in 2020, such as a loan or a commercial line of credit, you may be able to deduct the interest on the borrowed funds. For example, if you use a line of credit to purchase equipment or inventory or to fund wages, the interest will be treated as an “ordinary and necessary” business expense by the IRS.Read more about How commercial credit lines affect your taxes.

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7. Decide whether revenue should be deferred

Want to reduce your tax liability and maintain cash flow? If you are a small service-based business, you can postpone your revenue until next year by issuing an invoice after December 31. Obviously, you have to pay the tax in the end, but if you need to reduce your estimated tax for this year, things to consider. However, please don’t forget that this year’s deferred income may push you to a higher tax bracket next year. If you are more willing to pay tax now, please issue an invoice as soon as possible after the project is completed, instead of waiting until the end of the month to declare your income for the 2020 tax year.

8. Maximize your retirement plan contributions

If you are self-employed and have an IRA or simplified employee pension (SEP), you must contribute before the 2021 tax day, but maximizing your contributions before December 31 will reduce your taxable income for the year .This IRA’s greatest contribution USD 6,000 in 2020 (plus USD 1,000 if you are 50 years old) and 57,000 USD SEP plan (or 25% of net income from self-employment).

Act now, don’t delay

2020 is a challenging year, but don’t postpone these important year-end tax planning considerations. Not all of them apply to your business, but those that apply to your business will affect your bottom line and enable you to better weather the storm when the tax season arrives.

Disclaimer: Fundbox and its affiliates do not provide financial, legal or accounting advice. This content is for reference only and is not intended to provide and should not be used as a basis for financial, legal or accounting advice. You should consult your financial, legal or accounting advisers before making any transactions.

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