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Whether 2021 will bring higher taxes for small business owners may depend on the results of two Georgia Senate races that will be decided in January.
Indeed, two contestants in the Peach State are moving towards runoff in early 2021. Those races are between GOP Sen. Kelly Loeffler and Democratic candidates Rafael Warnock and Sen. David Perdue, R-Ga. And Democrat John Ossoff.
Those elections will determine whether Democrats get a 50-50 split in the Senate – and whether President-Elect Joe Biden’s tax plan reveals more aggressive provisions.
One thing, however, remains true for the owners of all businesses: it is better to pay less to Uncle Sam.
Here are five steps that entrepreneurs can take to reduce the taxes they will owe for this year.
1. Qualified Business Income Reduction
The Tax Cuts and Jobs Act cut a qualified business income for owners of pass-through businesses, including S-corporations and partnerships.
Business owners with less than $ 163,300 in taxable income for 2020 ($ 326,600 if married and filing jointly) may be eligible to deduct up to 20% of their qualified business income.
Above that limit, complex rules apply. Work with a tax professional to determine if this strategy makes sense for you.
For example, filers in “designated service trades or occupations”, including attorneys, accountants, and doctors, cannot claim a deduction if their 2020 taxable income exceeds $ 213,300 for single filers (married-filing- $ 426,600 jointly).
2. Bonus Depreciation Rules
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The CARES Act fixed a glitch in the Tax Cuts and Jobs Act that prohibits businesses from making 100% depreciation deductions for fixed property used in commercial locations, including lighting fixtures and floors.
Before being fixed, business owners must spread the cost of those items over several years. Now they can figure out the full cost.
Grant Thornton’s National Tax Office managing director Dustin Stamper said, “This benefit is most widely used by retailers, but it is available to any business with commercial or office space whether leased Or be owned. ”
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Even better, the new rules allow businesses a 100% depreciation deduction on investments made in the last three years and are most favorable for whichever year they are recognized.
“Getting a refund can be faster by amending 2018 or 2019 returns,” Stamper said, but whichever year you can use the deduction is the most helpful.
3. Set up a retirement plan
There is a slight delay in this year, but businesses can still make a retirement plan and cut contributions made to it.
The plan can be a defined benefit or defined contribution plan.
You have to set the plan before the end of the year and the contributor has to do the due date of the employer’s tax return, plus the extension.
“It allows business owners to take money from the company, put it in a pension plan for the principal owners and receive a deduction,” said Robert Spielman, tax partner at CPA firm Markume LLC. “This is a big deal for owners of pass-through corporations.”
4. Employee retention credit
If your business has been adversely affected by the epidemic and you have not obtained an excusable loan through the Paycheck Protection Program, you may be eligible to claim an employee retention credit.
Any business whose gross receipts fell more than 50% in a quarter this year as compared to the same quarter in 2019 may be eligible. The credit is equal to 50% of up to $ 10,000 in qualified salary paid per employee.
In other words, the credit can be up to $ 5,000 per employee that you put on payroll. There are limits for occupations with more than 100 workers.
5. Depending on your business, revisit your accounting method
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The Tax Cuts and Jobs Act made cash accounting methods available to most businesses with annual gross receipts of less than $ 25 million.
The cash method allows businesses to recognize income and expenses, as they are earned rather than earned or accrued and accrued according to the earned method.
Switching to a cash basis can reduce your taxable income or increase operating losses – and potential return. This is because businesses using this accounting method can reduce income or accelerate expenses.
Cash-basis accounting becomes simpler for business owners and has lower compliance and bookkeeping costs than the follow-up method.
Typically, you will also have to file Form 3115 with the IRS to report changes in accounting method.
“It’s an unusual year because many businesses are not doing long-term tax planning,” Spielman said. “They are trying to generate cash and worry about future years.”