It’s that time of the year when business owners across the country start preparing to file their taxes. For many, 2020 has been a difficult year, but the U.S. government has played a supportive role in helping struggling businesses by providing a number of tax incentives to help weather the storm, including programs and special inducements. Staying on top of any tax changes can potentially help you save money and better support your business in the current and coming year. Here's everything you need to know about filing your taxes in 2021 as a small business owner.
What’s New This Tax Season?
The events of the last year forced countless businesses to temporarily shut down, downsize and even permanently close. To help small businesses deal, several government loan programs and tax credits were launched by the federal government. A number of these programs came with the Coronavirus Aid, Relief and Economic Security Act, also known as CARES, which was a $2.2 trillion-dollar economic stimulus bill signed into law on March 6, 2020, to support businesses and workers across the country.
Here are some of the changes for this tax season, due to the CARES Act and otherwise.
The standard deduction was also increased for 2020. Married couples have seen their deduction increase to $24,800 from $24,400 (2019). Single filers can also claim an extra $200 for a total standard deduction of $12,400. Filers that are head of household can get $18,650 for their standard deduction, which constitutes a $300 increase from 2019.
Social Security Tax Deferment
The CARES Act allows employers and the self-employed to defer paying social security taxes through the end of 2020, with repayment spread out over two years.
Support from the government has helped keep many businesses afloat and has provided for unemployed workers who, for no fault of their own, were unable to earn a living. According to the SBA, two-thirds of the $500 billion dollars that went to PPP were for $50,000 or less and provided funds to help businesses cover payroll, rent, utilities and other business expenses for up to 24 weeks. The good news about the PPP loans is that small business borrowers may not even need to pay back the government as long as they apply for loan forgiveness. In addition, they will not be liable with a tax bill as result of the loan.
Federal income tax brackets have changed to account for inflation. The first three brackets for single filers are now: 10 percent tax rate for incomes of $9,875 or less; 12 percent tax rate for incomes over $9,875; and 22 percent for incomes over $40,125.
Additional financial support has also come through direct stimulus checks provided by the federal government. According to the IRS, the more than 160 million stimulus checks sent to Americans will not be taxable, and they do not reduce the taxpayer's refund when they file for taxes. Individuals and couples that file jointly that did not receive a stimulus payment or only a partial payment may be eligible to claim the Recovery Rebate Credit when they file their tax return.
Business Loss Limitations
Another tax change due to the CARES Act, the limitation on excess business loss has been repealed for 2018, 2019 and 2020 tax years. You can file an amended return if you filed a 2018 or 2019 return with the limitation.
Business Interest Expense Limitations
Business owners are limited by the amount of business interest expenses they can deduct. For taxes being filed in 2021, the limitation of 30 percent of the taxpayer's adjusted taxable income (ATI) has been increased to 50 percent.
Net Operating Losses
Net operating losses (NOLs) from 2018, 2019 and 2020 can now be carried back five years, and the previous limitation to only offset 80 percent of taxable income in carryover years has been suspended.
New Tax Credits
For 2020, businesses can also qualify for two new employer tax credits: Credit for Sick and Family Leave and the Employee Retention Credit.
As for unemployment checks, unless you already have federal and state taxes automatically deducted with your weekly payments, you will owe taxes when you report the total amount of unemployment insurance payments received in 2020. Make sure to have your 1099-G and report the income received.
Charitable donations have been increased for 2020. According to the IRS, the CARES Act "also temporarily suspends limits on charitable contributions and temporarily increases limits on contributions of food inventory." Filers who do not itemize their charitable deductions can also take a deduction of $300 for cash contributions to charitable organizations.
New Start Date for Filing Taxes in 2021
According to the Internal Revenue Service (IRS), February 12, 2021, will kick off tax season. This is when the tax agency will begin accepting and processing tax returns for 2020.
Other important dates taxpayers should keep in mind for this year's filing season include:
- W-2 and 1099-MISC. If your business has employees or if you use independent contractors, you must provide them with their Form W-2 (for employees) and Form 1099-MISC (for independent contractors). As a business owner, you were required to submit a W-2 to your employees by February 1, 2021, and a 1099-MISC was required to be sent to your contractors by January 31, 2021.
- First week of March. Expect tax refunds to begin reaching those claiming the Earned Income and Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) if they filed their taxes electronically with direct deposit.
- Businesses that are filing taxes as an S Corp must do so by April 15, 2021.
- April 15, 2021. Deadline for filing 2020 tax returns.
- October 15, 2021. Deadline to file for those requesting an extension on their 2020 tax returns.
Make sure to check IRS.gov for the latest tax information, including filing updates and changes.
Keep Tabs on Your Deductions
Whether your business is thriving or facing economic difficulties, you will want to make sure that you are taking advantage of tax deductions that you are eligible for. This will allow you to retain more of what you earn and apply capital toward improving and growing your business. Some of the top deductions that businesses take include:
- Salaries and Benefits. You can deduct 100 percent of what you pay your employees. (Remember: If you need help with payroll due to the pandemic you should apply for the Payroll Protection Program.)
- Professional Services. If you received help to establish and run your business and required support in the form of legal advice, an industry consultant, or an accounting service for help with taxes, the cost for these services are tax deductible.
- Credit Card Fees. This covers fees charged by your business credit cards, as well as the banks you use for your small business. Interest payments on loans are also tax deductible.
- Licensing Fees. Depending on the type of business entity that you have, you can deduct the annual filing fees and taxes.
- Business Insurance. Your policy premiums can usually be deducted from your income.
- Rent. In addition to your office, store or working space, this deduction can also include equipment that you rent. If you run your business from home, make sure to take the home office deduction.
- Telephone and Internet. These are two necessary business expenses that every small business owner needs. Some of the packages offered by providers can be costly, so it’s good to know that this is considered a business deduction.
- Advertising. If you are promoting your business and advertising your products or services, the cost of getting the word out is tax deductible.
- Business Travel. This can include your travel fees, meetings, conferences or special events that are for business purposes.
- Uncollected Debts. This can be unpaid invoices and fees from customers, clients and suppliers.
- Business Meals. You can deduct up to 50 percent of your meals if they involve business and are necessary for your business. The meal must be with and for a client or consultant. If you are not part of the meal, you must have an employee present to represent your business. You can also deduct 100 percent if it is for an office party.
Other deductions and write-offs can include equipment and property depreciation, home office, education costs, health care expenses, retirement contributions and vehicle use. To make the most out of all these, it is important to consult with a CPA or accountant, which, as already noted, can be its own deduction.
Small Business Tips for Filing Taxes in 2021
Small business owners should think about taxes throughout the year and plan for the tax implications of any decisions that they make, potential tax savings and deductions that they can apply for next tax season, as well as stay one step ahead of the process by paying quarterly taxes.
Additional tips that can help small businesses operate efficiently and lower their taxes due include:
- Invest in your business by putting money into technology and tools that will help improve your company's productivity and output. The good news is that as per Section 179 of the IRS tax code, businesses can "deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year." Ideally, this incentive will help motivate businesses to invest in their growth, especially if you can deduct the cost!
- Plan ahead by thinking about the end game — retirement. Often referred to as the Saver's Credit, this can be done by socking money away in your retirement account weekly or monthly. The tax benefit here is that the money you invest in your account will provide you with a credit that will help lower your tax liability.
- Keep your business and personal expenses separate. This will work to avoid any conflict with your personal expenses and risk of potential tax issues and liabilities against your business. It is also advisable to operate your business using a dedicated business bank account or credit card. This will allow you to keep track of your expenses and itemize your business expenses.
- Always keep good records of your revenue and expenses and use an accounting method that is optimal for your business needs.
When it comes to filing your taxes, consider hiring a professional and filing electronically. Incfile has a Business Accounting service with a free tax consultation. Our professional accountants can assist you with your returns and ensure that you are not making any costly errors in your filings. Sign up for your free tax consultation today to get started with your taxes.