Tax season is in full swing, which means you may be writing a check to Uncle Sam in the not-too-distant future. And if you’re like most business owners, tax preparation is probably the last thing on your mind—especially this year.
The good news is, certain tax strategies for small business owners can help minimize what you owe. So if this is the first time you’ve thought about your taxes all year, don’t worry. Here are a few ideas that may help lower your 2020 tax bill.
Looking For Ways To Reduce Your 2020 Tax Bill? Consider The Following Tax Strategies For Small Business Owners.
Small Business Tax Strategy #1: Take Deductions
A tax deduction is any expense you can deduct from your taxable income. The IRS doesn’t provide specific guidance for every industry and profession as to which expenses are deductible. Instead, it simply states that a business expense must be both ordinary and necessary to be deducted. Beyond standard business expenses, below are a few deductions you may be eligible for this year.
Home Office Deduction
You may be able to take advantage of the home office deduction this year if the pandemic kept you homebound for a good part of 2020. However, the IRS has specific requirements for your home office to qualify. First, it must be a principal place of business. In addition, you must use it regularly and exclusively for business activities. In other words, don’t assume you qualify for this deduction just because you work from home part of the time.
Covid-19-Related Tax Provisions
The CARES Act and subsequent relief package passed earlier this year include several tax provisions for small business owners. For example, you can temporarily fully deduct business meals, as well as expenses covered by a PPP loan.
If you don’t want to comb through the entire bill yourself, check with an expert. Your business may qualify for other pandemic-related tax breaks in 2020.
Qualified Business Income (QBI) Deduction
The Qualified Business Income Deduction allows eligible taxpayers to deduct up to 20 percent of qualified business income (QBI). In general, your total taxable income in 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify.
Small Business Tax Strategy #2: Claim Credits
Unlike deductions, tax credits can be subtracted dollar for dollar from the amount you owe in taxes. As a small business owner, you may be eligible for additional tax credits. However, the following credits may be new to you this year.
Earned Income Tax Credit (EITC)
If you took a significant pay cut this year, you may be eligible for an EITC credit. To qualify for this credit, the IRS must consider your income low to moderate. The credit amount depends on your income and whether or not you have children.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides additional relief for taxpayers who qualify for this credit this year. Specifically, if your earned income was higher in 2019 than in 2020, you can use the 2019 amount to figure your EITC for 2020.
Covid-19-Related Tax Credits
The Families First Coronavirus Response Act provides businesses with tax credits to cover certain costs of providing employees with paid sick leave and expanded family and medical leave for Covid-related reasons. In addition, the CARES Act includes an employee retention tax credit for eligible businesses.
Small Business Tax Strategy #3: Contribute To Tax-Deferred Accounts
Another way to reduce your taxable income is to take advantage of tax-deferred savings accounts. If your free cash flow is tight this year, you may not be able to maximize the benefits of contributing to these types of accounts. However, these options are here for you and worth considering as your business grows more profitable.
Fund A Retirement Plan
Contributions you make to your own retirement accounts or a sponsored retirement plan for your employees are tax-deductible. If you’re self-employed, you have several tax-advantaged retirement savings plans available to you, including a Solo 401(k), SEP IRA, SIMPLE IRA, and defined benefit plan. Contribution limits and tax benefits vary depending on the type of account you choose but can result in significant tax savings.
In addition, you can reduce your tax bill by contributing to your employees’ retirement accounts. Employer matching contributions, profit-sharing contributions, and safe harbor contributions to an employee retirement plan are tax-deductible. Moreover, administrative fees and startup costs related to your company’s retirement plan may also be tax-deductible.
Open A Health Savings Account
Opening and/or contributing to a Health Savings Account (HSA) is a great option if you’re covered by a qualifying high-deductible health plan. These accounts are attractive because they’re triple tax-free. In other words, your contributions are tax-deductible, your money grows tax-free within the account, and withdrawals aren’t taxed as long as they’re used on qualified medical expenses. In addition, an HSA can turn into a retirement account at age 65, boosting your overall savings.
How To Take Advantage Of These Tax Strategies
These are just a few of the tax strategies for small business owners you may be able to leverage. There may be other ways to reduce your taxable income depending on your personal circumstances and the nature of your business. As your accounting and tax needs become more complex, you may want to consider hiring outside experts to help you avoid overpaying taxes. Please contact us if you need a recommendation.
In addition, Oak Capital Advisors specializes in tax and retirement planning for entrepreneurs and small business owners. If you’d like to discuss the tax strategies available to you and your business within the context of your personal financial plan, we encourage you to get started by requesting a free retirement assessment.
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The opinions expressed in this blog are for general informational purposes only. They are not intended to provide specific tax advice or recommendations for any individual or business entity. Views reflected in the commentary are subject to change at any time without notice.