Here are seven ways that small businesses can save money on taxes before the end of the year.
If you own a small business, taxes are almost certainly one of your top expenses. Although it's critical to be proactive and employ sound tax-planning methods throughout the year, you may still take steps now to save money for your company before the year closes in 2021. Here are eight of them.
1. Purchase capital goods
You can buy machines, automobiles, computers, software, furniture, and other types of capital equipment and deduct up to $1,050,000 this year instead of depreciating them over time, thanks to accelerated depreciation regulations. And keep in mind that you don't have to pay for this right immediately. Even if you're financing the purchase, the regulations enable you to deduct the cost as long as the item is in use by the end of the year.
2. Contribute to charitable causes
You can take a $300 deduction ($600 for those filing jointly) on your tax return this year, in addition to the standard deduction, thanks to previous COVID-19 stimulus packages, and your firm can deduct up to 25% of its income for charitable contributions. After 2021, the additional personal deduction will be eliminated, and the business deduction will be reduced to 10% of your company's income. This is not only a terrific method to save money on your taxes, but it can also serve as a reminder to potential contributors to give before the benefit expires if you're involved in a charity.
3. Make sure your balance sheet is in order.
Acknowledge that those long-overdue receivables are unlikely to be paid. And that "fantastic bargain" you struck five years ago is still collecting dust in your warehouse. Use the following two weeks to get rid of old inventory and old, non-collectible receivables from your books. You can deduct the cost of these assets by selling them and then writing them off.
4. Contribute to your retirement account to the fullest extent possible.
You might save up to $58,000 in your 401(k) retirement plan this year, depending on how much your employees contribute. However, go to your benefits adviser to determine how much you can contribute because "highly paid" individuals are subject to limits. You may be able to contribute up to $6,000 to a personal IRA, depending on your eligibility. The good news is that you can make these selections after you've filed both your business and personal forms, so there's still time. Don't forget about after-tax Roth IRAs and 529 plans, which allow you to contribute after-tax money and have it grow tax-free as long as the money is utilized for higher education, private school, or religious school expenditures.
5. Assist a coworker with student loans
Employers can now take deductions of up to $5,250 per year per employee through 2025 when assisting with student loan repayments, and the employees will not be taxed, thanks to COVID-related legislation. Given the staggering amount of student debt that many younger workers are saddled with, a special payment or bonus to them at the end of the year would go a long way — and could be a smart incentive to consider in order to recruit new employees.
6. Take another look at the Employee Retention Tax Credit.
Although most firms' eligibility for this benefit expired at the end of September this year, you can still modify your federal payroll tax returns from 2020 and 2021 if you believe you qualify. To be qualified, you must show that you were either completely or partially shut down as a result of COVID, or that you had revenue declines of 50% (for the last three quarters of 2020 compared to the same quarter in 2019) or 20% (for the last three quarters of 2019). (for the first three quarters of 2021 compared with the corresponding quarters in 2019). If you qualify, the credit is substantial — up to $7,000 per employee per quarter in 2021, for example — and if the credit exceeds the amount you paid in payroll taxes, you can get the difference back. Many payroll services can assist with the calculation of this credit.
7. Take advantage of the Earned Income Tax Credit (EITC).
This additional credit has been extended until 2025, and it can save you up to $9,600 per year per employee if you hire someone who is either out of the military, in poverty, out of prison, or has been unemployed for more than six months (there are other eligibility requirements). If you calculate the credit ahead of time before employing a new employee, as some of my customers do, you may also share the tax savings in the form of a hiring bonus, which could be the deciding factor in bringing on that top new hire.
The good news is that some of these tax breaks will remain in effect through 2021. That's why it's critical to meet with your account at least twice a year — in the spring and fall, for example — to ensure you're staying on top of the regulations and making the best decisions to reduce your long-term tax liability.
by: Nikki Swartzwelder, CEO, Black Forest Consulting
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