HOW 2020 WILL IMPACT BUSINESS TAXES IN 2021 & HOW YOU CAN PREPARE
Updated: Jan 19
With 2020 rapidly coming to an end, it's time for business owners to prepare to file their taxes. A little preparation will help the process go as smoothly as possible and allow your business to lower its tax obligation. Here are some proactive things you can do to ensure accurate filing of your business taxes:
1. Examine Your Current Losses
One of the provisions of the CARES Act reenacted a guideline that permits businesses to use their current losses against their past income in exchange for an immediate refund. You can carry back these losses for five years against income from your previous tax returns.
2. Set up Employer-sponsored Retirement Savings Plans
You can set up employer-sponsored retirement savings plans both for yourself and for your employees; employer-sponsored retirement savings plans are an effective way to lower your small business taxes. Though you can typically make contributions to the plan for the 2020 tax year up until the filing deadline, some plans must be established in 2020 to qualify.
3. Decide Whether You Should Defer Expenses or Income
Depending on your accounting methods, if you anticipate that your 2020 profits will be lower than usual, you might try to collect more of the payments that you're owed and delay paying deductible expenses until 2021. This will help you save money on your business taxes in 2020 and 2021. Deductions will be more valuable when your profits recover in 2021, and any payments that you collect in 2020 will likely be taxed at a lower rate.
Conversely, if you anticipate your 2020 profits to be higher, you can save money on your 2020 business taxes by not collecting payments until 2021. This will somewhat reduce your taxable income. Try to pay more of your deductible expenses to reduce your overall profits and your tax obligation.
4. Look at the Timing of Your Payroll Tax Deduction
The CARES Act permits businesses to put off paying their share of the 6.2 percent Social Security taxes for the remainder of 2020. Should you opt to do this, half of the deferred amount is due by the end of 2021 and the remainder will be due by the end of 2022.
However, while this will help you keep cash on-hand, consider the impact on your business taxes. You can't deduct your share of payroll taxes until you pay them. Weigh your need for cash liquidity versus your need to lower your obligation for your small business taxes.
5. Take Advantage of Disaster Loss Refunds
Certain refunds are available for businesses in areas that are designated as disaster areas to claim on their prior-year tax returns to help them save on their business taxes. However, President Trump issued a disaster declaration for the entire U.S.A. due to the COVID-19 pandemic; this means every single state and U.S. territory is a designated disaster area.
Hire a CPA to Help with Your Business Taxes
A business CPA can help you identify what losses your business can claim for a quick refund. A CPA can also help you understand all the changes to your taxes caused by the provisions made for COVID-19. Contact FAL today at 702-870-7999 for more information.