Facing everything from empty sales floors to painful staff shortages, entrepreneurs have been uniquely hurt by 2020 and the extent of the damage isn’t fully known yet. A Yelp economic impact report released in September found that almost 100,000 small businesses in the country had closed their doors permanently while many others struggle under the current conditions.
Nevertheless, the taxman cometh, and we find ourselves at the time of year when entrepreneurs face mountains of paperwork. Yet despite the complexity of this year, there is some good tax news for business owners if they know which levers to pull.
Let’s look at a few recent provisions for tax planning for business owners that might help, as well as some old standards you want to make sure you’re optimizing.
Small Business 401(k) Options
Stock wisdom holds that small businesses aren’t able to offer employees access to 401(k) or other defined contribution plans. The plans are expensive to run, which can be either prohibitive for the employer or require the employee to pay so much in fees that they don’t realize much growth.
In this conversation, maybe the whole tide hasn’t turned, but at least the direction of the current has. Recent legislation has freed up small business owners to more easily join an MEP (multiple employer plan) to set up a 401(k). It’s a kind of collective plan in which a group of small/medium businesses in either the same area or in the same industry band together on a 401(k) plan that works for all of them.
An MEP can extend the tax advantages of running a 401(k) plan available to small and medium-sized entrepreneurs. The tax-advantage of a defined contribution plan is one of its main perks for workers, and from the other side of the table, the employer match is a tax deduction for the employer. So not only can you attract employees by offering them a reduced tax footprint, you can reduce your own as a business.
The IRS has also recently created a retirement plan start-up credit for small business owners. SBOs with less than 100 employees can claim a tax credit for the ordinary and necessary start-up costs for these programs. You can write off up to 50% of these costs (up to $500 per year) for the first three years you’re in the plan. It’s not a pot of gold, but every dollar helps, especially for entrepreneurs.
The Tax Cuts and Jobs Act changed the tax landscape for individuals and businesses, and one of the important provisions is the 199a Deduction.
This provision provides for a deduction of up to 20% of qualified domestic income for the owners of pass-through businesses, which include:
- Sole proprietorships
- LLCs not electing taxation as Corporation
- S Corporations
Keep in mind that the provisions of the 199a deduction are complex, and it doesn’t apply to just any income or any kind of business. Yet, if you qualify you could save big on your taxes this year, and you could also develop a strategy through other tax maneuvers to put yourself within income range for the deduction. Reducing your taxable income by contributing to your 401(k) could help put you in range for the 199a, as well as growing your retirement account.
This provision is especially complicated, so we recommend discussing it with your advisor. Don’t disqualify yourself, but don’t count on it as part of your tax plan until the ink is dry.
Business in the Time of COVID-19
COVID changed life, and the fallout prompted more changes via legislation, and we’ll feel the effects for a long time. Legislators have made some provisions for tax planning for business owners that can help with the 2020 tax year; here are a few.
Net Operating Losses
The CARES Act, passed under COVID, allows for carrybacks of Net Operating Losses (NOL) in 2020 over the last five years. Before this, NOLs could only be applied to future years, but this provision allows the flexibility to look back.
Qualified Improvement Property
The CARES Act carries some helpful revisions for deductions allowable for depreciating assets. Several internal changes to commercial buildings qualify, and this can help free up much-needed cash. If you made any building improvements, talk with your advisor to see if they qualify for this tax perk.
Employee Retention Credits
Another tax provision in the CARES Act encouraged business owners to keep employees on the payroll during the confusion and closures of last year. This is a tax credit for up to 50% of qualified wages an employer pays between March 12, 2020, and January 2, 2021. You may still claim the ERC even if you received a loan under the Paycheck Protection Program (PPP). However, you can only claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.
A Word about Fraud
As a business owner, one of your many responsibilities to your employees is to keep their information safe. In the digital world, identity theft is an ever-present danger, and the relationship between employer and employee can be a point of entry for scammers, especially during tax time.
One scheme that appears during tax time is filing fraudulent returns. A scammer will steal a Social Security Number, file the return and make off with the refund. When your employee files, their refund is already gone!
Specifically for businesses, a scam known as Business Email Spoofing uses work emails to gather information. A hacker gains access to someone’s work email and intercepts W-2s or other tax forms with vulnerable information on them. With access to the victim’s accounts, the scammer can change the options to route money to a different bank account or even purchase gift cards the scammers then send to themselves.
Businesses that closed their physical location to work remotely during quarantine can be especially vulnerable to this scam. More time online and less in-person interaction is the scammer’s playground.
For individuals and businesses, tax season is a time to be especially aware of fraud, even more so in a digital world that’s been disrupted by COVID. Encrypting sensitive information, insisting on complex passwords and keeping information on a “need to know” basis are simple measures anyone can take. The Federal Trade Commission has helpful resources on how to secure your business.
Tax Planning, Not Just Tax Filing
Despite a year that was anything but normal, the absolutely predictable tax season is upon us again. Remember, tax planning for business owners, not simply tax filing, is the key to protecting your wealth in the long run. You have new opportunities this year as a business owner, as well as some unanticipated issues for this year that may need attention.
Our financial advisors and staff can help you put together a plan for not only taxes but all your wealth, that helps you reach your goals. Get in touch today to start the conversation.
This piece is not intended to provide specific legal, tax or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Tax preparation services are not offered through CWM, LLC or Cetera Advisor Networks.