Every small business wants to find the best ways to reduce their tax liability and better conduct their affairs with the IRS. Also, in 2021, as many companies face reduced income due to the COVID-19 pandemic, business owners will be looking for ways to cut costs wherever possible. Here are five key small business tax tips to help you do so.
1. See if your business is eligible for different tax treatment
Many small businesses can deduct 20% of their qualified income in calculating their taxes. This deduction generally applies to pass-throughs (companies where the owners pay the taxes themselves). The Tax Cuts and Jobs Act of 2017 reduced C-corporations’ tax rate to a flat 21%. Your tax practitioner can advise you as to whether it is better to stay a pass-through business or make the transition to a C-corporation.
2. Increase your business savings plan – or get one started
Small businesses have the option of running a variety of retirement plans for their employees, such as 401k, Simple IRA and SEP IRA. The contributions the company makes to these funds are tax-deductible. If you already have one of these plans in place, it might pay off to increase your contributions. If you don’t have one, you should definitely get one going this year.
3. Invest in new equipment
If you buy new or used equipment and put it into service before the end of the tax year, you could be entitled to a federal tax deduction of up to $1.05 million. The cap on this expenditure is $2.62 million. If you spend on new equipment within those limits, you could claim back a considerable amount of money.
4. Contribute to charity
Charity contributions are a well-known method of reducing tax liability. You can usually deduct the equivalent of the fair market value of the assets you donate. Consult your certified public accountant to find the best way to make this method work for you.
5. Make the most of your losses
If, like many business owners, you have seen a significant reduction in income during 2020, you can use the provisions of the CARES Act to apply a net operating loss to income from the past five years for a potential immediate refund. Speak to a tax practitioner to see if this applies to you and how to make the claim.