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Whether 2021 will bring higher taxes for small business owners may depend on the results of the two races in the Georgia Senate to be decided in January.
In fact, there are two competitions coming up in Peach State in early 2021. These races are between GOP Senator Kelly Loeffler and Democratic candidate Raphael Warnock, as well as Senator David Perdue, R-Ga., And Democrat Jon Ossoff.
These elections will determine whether Democrats get a 50:50 split in the Senate – and whether the more aggressive provisions in President-elect Joe Biden’s tax plan unfold.
However, one thing applies to all entrepreneurs: it is better to pay Uncle Sam less than more.
Here are five steps business owners can take to lower the taxes they will owe this year.
1. Qualified business income deduction
The Tax Cuts and Jobs Act created a qualified business income allowance for owners of transit businesses, which include suburban businesses and partnerships.
Entrepreneurs with taxable income less than $ 163,300 for 2020 ($ 326,600 if married and filing together) can deduct up to 20% of their qualified business income.
Complicated rules apply above this threshold. Work with a tax advisor to determine if this strategy makes sense for you.
For example, applicants in “a specific service industry or business,” including lawyers, accountants, and doctors, may not claim the allowance at all if their 2020 taxable income exceeds $ 213,300 for single applicants ($ 426,600 for joint filing of marriages).
2. Rules for bonus depreciation
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The CARES Act fixed a bug in the Tax Cuts and Jobs Act that prevented companies from applying a 100% depreciation allowance on certain properties used in commercial space, including lighting and floors.
Before the fix, business owners should have spread the cost of these items over many years. Now you can deduct the full cost in advance.
“The benefit is most commonly used by retailers, but is available to any business with commercial or office space, whether it is rented or owned,” said Dustin Stamper, executive director of Grant Thornton’s National Tax Office.
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Even better, the new rules allow companies to take the 100% depreciation allowance on investments over the past three years and recognize them in the years most beneficial to them.
“It may be faster to get refunds by changing returns for 2018 or 2019, but you can use the deduction in the year that is most helpful,” said Stamper.
3. Establish a retirement plan
It’s getting a little late in the year, but companies can still set up a retirement plan and deduct contributions.
The plan can be a defined benefit or a defined contribution plan.
You must prepare the plan before the end of the year and contributions must be made by the employer’s tax return due date plus any renewals.
“It enables business owners to take money from the company, add it to a principal owner retirement plan, and receive the deduction,” said Robert Spielman, a tax partner with CPA firm Marcum LLC. “It’s a big deal for pass-through business owners.”
4. Employee Loyalty Credit
If your business has been hit by the pandemic and you haven’t received a futile loan through the Paycheck Protection Program, you may be able to apply for a loyalty loan.
Any company whose gross income in a quarter of this year has decreased by more than 50% compared to the same quarter of the previous year is eligible to participate. The credit is equal to 50% of the qualified wages paid per employee, up to $ 10,000.
In other words, the balance can go as high as $ 5,000 per employee that you’ve placed on the payroll. There are restrictions for companies with more than 100 employees.
5. Review your billing method by company
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The Tax Cut and Jobs Act made cash settlement available to most companies with gross annual revenues less than $ 25 million.
The cash method enables companies to record income and expenses as they are received or paid, rather than when they are earned and accrued using the accrual method.
Switching on a cash basis can lower your taxable income or increase an operating loss – and a possible refund. This is because companies using this accounting method can defer income or accelerate expenses.
Cash accounting is typically easier to follow for business owners and has lower compliance and accounting costs compared to the accrual method.
Typically, you will also need to file Form 3115 with the IRS to report a change in billing method.
“This is an unusual year as many companies are not doing longer-term tax planning,” said Spielman. “They are trying to make money and worry about future years later.”