2020 has been a whirlwind for everyone—but it’s especially taken its toll on small business owners. Add in changes from the CARES Act and the Tax Cuts and Jobs Act, and you may feel confused about how to prepare for tax season.
We reached out to our CPA firm network to bring you 8 items you should review before we head into the New Year. Going through this checklist will help you minimize your tax burden and start 2021 off on the right foot.
1. Review IRS Elections (Especially If You Had A Net Operating Loss)
If you had a net operating loss (NOL) this year, double-check your IRS elections to ensure you made the correct ones. This is one of the biggest issues our CPAs see when they help small business owners file their taxes.
Under the CARES Act, you can now carryback any NOLs from December 31, 2017, through January 1, 2021, to any of the five preceding taxable years. (1) You can also choose to exclude any section 965 years from your carryback period instead if you wish.
All of these decisions play a role in how much money your business may owe in taxes. Talk with a CPA or financial professional about which elections may be right for you.
2. Double-Check Major Election Dates
How you structure your small business can make all the difference in the world when it comes to taxes. A tax professional can help you decide which entity type is the best for your business and help you apply before the deadline hits.
For example, let’s say you found out you could save more in taxes by structuring your business as an S corporation instead of an LLC. If you’re a new business, you have two months and 15 days from the day you file your articles of formation to file your S-corp elections. (2) So, if you filed your articles of formation on March 1, you have until May 16 to file your S-corp election for it to take effect that same tax year.
3. Review Charitable Deductions
The CARES Act brought about major tax incentives to people who donate to charity in 2020. You can now write off up to $300 in cash donations from your tax return if you take the standard deduction. If you itemize, you can write off up to 100% of your adjusted gross income on any cash donations you make. Traditionally, this was capped at 60% of your AGI. (3)
4. Review Depreciation
New depreciation rules have come into effect in recent years due to the Tax Cuts and Jobs Act (TCJA). These changes allow you to write off most depreciable assets “in the year they’re placed into service,” according to the IRS.
Common items you can write off for depreciation include computers, equipment, machinery, cell phones, buildings, office furniture, and vehicles, as well as intangible items like copyrights.
Make sure you keep a list of everything that counts as a depreciable expense. Doing so will help you lower your business’s taxable income.
5. Check Eligibility For SEP IRA
According to the IRS, an employee can participate in an SEP IRA if they: (4)
Are at least 21
Have worked for the employer in at least 3 of the last 5 years
Received at least $600 in compensation for 2020 ($650 for 2021)
Business owners can choose to be less restrictive than this and allow other employees to participate in an SEP, but you can’t be more restrictive than these IRS rules allow.
Review your SEP IRA eligibility requirements to ensure employees can participate in the program if you want them to.
6. Spot Any Potential PPP Issues
Congress has loosened rules needed for PPP loan forgiveness. For example, you now:
Have 24 weeks to spend funds from the day you receive them
Must allocate at least 60% of PPP funds to payroll expenses
Have until December 31 to rehire the average number of employees you had as of February 15 (and pay them the same rate)
Must return any portion of your unused loan within five years if your loan was issued after June 5 (You have two years to pay it back if you received your loan before June 5.)
Even if you meet these requirements, you may have some hurdles to jump through if you’re applying for forgiveness. Some small business owners report spending over 90 minutes on the EZ application, while others estimate it took 10+ hours or more for complicated forms. (5)
Give yourself plenty of time to fill out these forms—and talk with your accountant and financial advisor about any potential issues you come across.
7. Spot Any Potential EIDL Issues
At the height of the pandemic, many small business owners applied for both PPP loans and economic injury disaster loans (EIDLs). What many people didn’t know at the time is that having an EIDL could reduce or eliminate your PPP loan forgiveness. (6)
If you’ve had both an EIDL and a PPP loan this year, talk with your team of financial professionals to see how this could impact your balance sheet as you prepare for the new year.
8. Review New Due Dates & Filing Methods For 1099s
Starting in 2020, any freelancers or contract workers who earned more than $600 from your company will receive Form 1099-NEC instead of 1099-MISC. NEC stands for “non-employment compensation”—and it’s only used for reporting independent contractor income.
1099-NEC forms are due on January 31. If this day falls on a weekend, they’re due the following business day.
How We Help
At Legacy Wealth Management, we specialize in helping small business owners accumulate, preserve, and enjoy their wealth for years to come. If you need help tying up loose financial ends before the new year rolls around, we’re happy to assist you. We also work closely with our network of CPA’s to make sure you’re getting seamless financial advisory services, including tax planning and cash flow management.
About TrentTrent Derrick is an LPL financial advisor and chief market technician at Legacy Wealth Management. Trent is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning, cash flow management, retirement planning, and bookkeeping. Trent has a bachelor’s degree from the College of Charleston and studied economics at the University of South Carolina, Columbia. He is a Chartered Market Technician® (CMT) and is working toward the Chartered Financial Analyst designation. Trent serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. When he’s not working, Trent, a proud Eagle Scout, enjoys volunteering with the Charleston Animal Shelter’s outreach program. Trent and his wife love to cook international cuisines and host dinner parties with their friends. To learn more about Trent, connect with him on LinkedIn.