As we wrap up 2021, it’s important to take a closer look at your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your business financial situation.
A small business has several options for its business and tax entity structure. The options are Sole Proprietor or LLC filing on a Schedule C, S-Corporation, C-Corporation or a Partnership. As your business grows and the tax landscape changes, it is recommended to revisit your business structure to ensure that you are operating under the most tax efficient structure and one that is most beneficial to your business goals and objectives.
One of the best ways a small business owner can cut their tax bill is to establish and contribute to a retirement plan. Employers can choose from a variety of IRAs, 401(k)s and other profit sharing and money purchase plans. There is also a tax credit available to offset the start-up cost of a new employer's retirement plan. An employer provided retirement plan can also be an added benefit to attaining and retaining the best employees in this competitive environment. In addition, some plans allow employers to make contribution up to and until the extended due date of their 2021 federal income tax return and retroactively contribute to 2021 taxable year.
Taxpayers can claim a business deduction for expenses arising from a qualifying use of all or part of a residence - this is known as business use of home. The residence must be used exclusively and regularly for business. Click here for more information on claiming the Business Use of Home on your tax return. In addition, employers may also reimburse employees for the business use of their home; this is non-taxable income to the employee and a tax write-off for the employer.
To compute an income tax projection, you must have an accurate & complete accounting records of your business income and expenses to date. We strongly recommend using a business bank account and/or business credit card for all your business income and expenses to ensure that no deduction is missed, and avoid comingling with personal expenses. .
If you have significant losses from 2018 to 2020, you may be able to carry those losses back up to five years, which can significantly impact a prior year where there was a tax liability. Let's explore if this option is for you.
If you invest in your business and purchased a business vehicle or other major asset in 2021, you may be able to deduct the entire cost in the year purchased. This deduction can be claimed with one of two accelerated tax depreciation methods available - the Section 179 deduction and the bonus depreciation. These depreciation deduction are available for qualifying asset that cost more than $2,500. Assets that cost less than $2500 can be expensed under the De Minimis Safe Harbor Election.
The amount of any PPP loan forgiveness is excluded from the federal gross income of the business, and qualifying expenses for which the loan proceeds were used on are deductible.
There is a 100% deduction (rather than the prior 50%) for qualified meal expenses paid for food or beverages provided by a restaurant. This provision is effective for expenses incurred in the years 2021 and 2022.
There are a variety of business credits available to off-set your tax liabilities. The following are a few of those options.
Retirement Plans Start-Up Cost Tax Credit
Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.)
Employee Retention Credit
The ERC is a refundable payroll tax credit that encourages businesses to keep employees on their payroll during the pandemic. This credit may be claimed by eligible employers who pay qualified wages to a qualifying employees from the pandemic started to September 30, 2021. Employers claiming the ERC must reduce their compensation deduction for tax purposes by the amount of the credit.
Family and Sick Leave Credits
These credits are intended to compensate employers and self-employed people for coronavirus-related paid sick and family and medical leave.
Research and Development Credit
Federal Research and Development tax credit are available to businesses that incur expenses related to a qualified research and development activities.
The New Markets Tax Credit Programs
This program provides federally funded tax credits for approved investments in low-income communities that are made through certified Community Development Entities"
Year-end planning equals fewer surprises
There are many other opportunities to discuss as the year-end approaches. t is important to consult with us, your tax expert before implementing any tax strategies. Please send us your questions, comments and concerns, we will love to explore these and other opportunities to reduce your tax obligations.