For most small businesses, every penny counts. Not only do owners need to optimize revenue, but it’s smart to minimize your tax liability. It’s never too early to kick off tax planning to lower your federal income tax bill before filing your taxes.
New tax incentives were put into place by the Coronavirus Aid, Relief and Economic Security (CARES) Act passed earlier last year as well as more recent legislation in 2020. Read on for ways to reduce your tax bill and save.
Tax credits for time off to get vaccinated
The Internal Revenue Service (IRS) recently announced that tax credits under the American Rescue Plan Act of 2021 (ARP) will be available to small businesses that provide paid leave to employees to receive or recover from the COVID-19 vaccine.
The program covers paid leave taken by employees receiving or recovering from the COVID-19 vaccine, from April 1, 2021, to Sept. 30, 2021. Employers eligible to receive these tax credits include businesses and tax-exempt organizations with fewer than 500 employees, as well as certain governmental employers. Up to two weeks of an employee's paid sick leave can be covered, with a limit of $511 per day and $5,110 in the aggregate, "at 100 percent of the employee's regular rate of pay."
Employee retention credit
The American Rescue Plan extends the availability of the Employee Retention Credit (ERC) for small businesses through December 2021 and allows businesses to offset their current payroll tax liabilities by up to $7,000 per employee per quarter. This credit of up to $28,000 per employee for 2021 is available to small businesses who have seen their revenues decline, or even been temporarily shuttered, due to COVID. Read the full IRS press release here: New law extends COVID tax credit for employers who keep workers on payroll.
Businesses that took out a Paycheck Protection Program (PPP) loans in 2020 can still go back and claim the ERC, but they cannot use the same wages to apply for forgiveness of PPP loans and to count toward the ERC. If your business had payroll costs that were more than the amount covered by your PPP loan, you may be able to claim tax credits for those additional payroll costs.
Paid leave credit
The American Rescue Plan extends through September 2021 the availability of Paid Leave Credits for small and midsize businesses that offer paid leave to employees who may take leave due to illness, quarantine, or caregiving. Businesses can take dollar-for-dollar tax credits equal to wages of up to $5,000 if they offer paid leave to employees who are sick or quarantining. Visit the U.S. Treasury’s website for more details about this credit.
Contribute to your retirement plan
Make contributions to a retirement plan, right off the top. The self-employed and small business owners have a plethora of retirement planning options to choose from, including contributions to a traditional IRA in addition to a 401(K), or SEP IRA. You can contribute up to $55,000 a year using this tactic.
Charitable donations are still deductible
Sole proprietors, partners in a partnership, or shareholders in an S-corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Corporations (other than S-corporations) can deduct charitable contributions on their income tax returns, subject to limitations. Utilize a donor-advised fund or donate directly to your choice of organization.
Take the home office deduction
If you’re a small business owner who could be taking this deduction, but you aren’t, you’re missing out on a great money-saving opportunity. That said, there are still some pitfalls, so check with the IRS guidelines about this tax-saving strategy.
Pay attention to auto expenses
If you use a personal vehicle for business purposes, do yourself a favor and track your business mileage. In 2021, the standard IRS mileage rate is 56 cents per mile for business miles driven, 14 cents per mile for charity miles driven and 16 cents per mile for moving or medical purposes. There are plenty of apps out there to help you monitor and manage your business mileage.
Consider a tax status change
If you’ve outgrown your current business structure in the past year, you may be able to change to one that’s a better fit. One common reason small businesses change structures is because they are seeking financing and the lender requests to review a formal business plan. But potential tax options are available that can lower your tax obligations. For example, LLCs can elect to be taxed like a C corporation by filing Form 8832 with the IRS.
The 6 most common business entities are below:
- Sole proprietorship
- General partnership
- Limited partnership
- Limited liability company (LLC)
- C-corporation
- S-corporation
Every business is unique so consult with a tax professional before you change your structure.
Final thoughts
These tips can potentially shave a healthy amount off your taxable income. Of course, it’s always a good idea to work with your accountant or another tax professional.
If you find that accounting duties are getting overwhelming or your taxes are confusing, it’s time to hire a professional. Read How to Hire an Accountant for Small Business for tips to help you find the right fit.
To make things even easier, opt for tax planning software to help you keep track of everything. The price of the software may be deductible, too. Check out tax planning software reviews on Capterra. You’ll read assessments by real small business owners and get information on pricing.
