If there is one thing America has a lot of, it is entrepreneurs. The entrepreneurial spirit feeds the American economy, which is no wonder many American corporations began as small, home-based businesses. However, 2020 was a devastating year for everyone. Several companies had to permanently close operations while others tried to work under pandemic restrictions.
Small businesses were hit hard by the pandemic. According to a report from Facebook, 2.1 million firms closed down permanently, and nearly one-third of small businesses are not operational anymore in the USA.
So, small business owners need to take any chance they get to save their companies. Fortunately, the government introduced several new tax incentives, breaks, and rules to sustain the economy. Following are some of the latest programs introduced by the government.
- Coronavirus Aid, Relief, and Economic Security (CARES) Act: The Paycheck Protection Program introduced by the CARES Act is a forgivable loan to small businesses. They can use this loan to fund payroll, pay their rent and utility bills. Furthermore, any money received through PPP is not considered taxable income.
- Employee Retention Tax Credit (ERTC): A business that had to fully or partially close because of a government-mandated shutdown can use ERTC to retrain staff members. They are also eligible for a tax credit of 50 percent of qualifying wages between March 13, 2020, to January 1, 2021.
- Families First Coronavirus Response Act (FFCRA): Businesses that provided sick leaves to employees suffering from Covid-19 can get 100 percent of the cost of sick leave pay and qualified healthcare plan expenses.
Here is the crux of the matter: several legislations reformed tax law in 2020 to sustain the pressure of Covid-19. However, according to Forbes, 93 percent of small-business owners overpay their taxes.
Most employees find it challenging to be assets to a company due to limited business knowledge. With Covid-19, educational institutions made higher education more accessible by offering online masters degrees.
Candidates who earned a master of business administration online have better odds of being hired and interviewed by business owners keen on surviving during the pandemic, and one of the ways is knowing how and where to save on taxes.
Following are eight ways businesses can save on taxes.
- Hire someone to help you out: Running a small business is a full-time job as entrepreneurs already have too much on their plate. So, adding government paperwork to a long to-do list can make things even more challenging. While a do-it-yourself tax system works for taxpayers with simple income tax returns, complex tax situations need an expert.
A competent professional can help you make better business decisions, and according to one survey, filers saved an additional $840 when they hired a professional. So, it is a good idea to have someone with an mban in your team when you file taxes.
- Keep an eye on the receipts: You should know how and where you spend your money to maximize your deductions. Therefore, organize your track receipts so you can make accurate log deductions.
Keep in mind that business travel charges, such as flights, hotels, and other transportation costs, are fully deductible. Save your receipts for these trips, and you are good to go.
- Vehicle costs and Home office costs: You might not have receipts for some expenses, such as vehicle costs and home office costs, but you can still get a tax deduction for these costs as a percentage of your overall expenses.
For home office expenses, you can either apply for $5 per square foot up to 300 feet or itemize the cost according to space. To calculate vehicle expenses, you must verify that you used the vehicle for business expenses.
- Take advantage of Retirement plans: Setting up and finding retirement plans can save you money. However, it should be a qualified plan recognized by the IRS. They include IRAs, 401(k)s, or 403(b)s. Remember that these plans defer taxes until the beneficiary withdraws the funds. Small business owners under 50 can contribute up to $5,500 to an IRA plan. Those above 50 can put $6,500 in retirement savings.
- Take advantage of tax credits: Tax credits are incentives the government gives to taxpayers for certain activities. They are better than tax deductions because they reduce taxable income.
Several new legislations offer tax credits to businesses that struggled in 2020. For example, business owners get credits for going green, providing health coverage to employees, and even qualified employee wages under the CARES Act 2020. The FFCRA also offers small business tax credits for giving paid sick leave to employees.
- Write-off purchases of business equipment: Fortunately, companies can also deduct costs of vehicles, machinery, and business equipment. Most of these write-offs apply within the first year of buying the equipment.
Section 179 deductions help you deduct the costs of assets when you use them. Businesses can also get extra benefits under the TCJA. Business owners can receive a hundred percent tax break for assets used in service between September 2017 to January 2023.
- Deduct the costs of gifts: Small business owners can deduct $25 per person on the cost of awards for customers and vendors. However, any gifts containing a business logo or that companies distribute as a matter do not qualify. Business owners cannot deduct entertainment costs unless they are related to your business.
- Use tax filing software: This tip is number one because tax filing software can help you prepare and file tax returns with minimal hassle. You do not have to go through records and recheck them for accuracy.
Furthermore, most tax filing programs have excellent customer support to help you out of a difficult situation. Some tax filing systems even help you determine which pricing plan works for you. TurboTax is an excellent tax filing software for first-time tax filers.
Small business owners can save a lot of money by following some simple tips. However, the most important hack for tax filing is to begin as early as possible. Most business owners leave this vital task to the last day and miss deadlines. Tax planning is a year-round activity that can save you last-minute stress and hassle. So, do not ignore your tax filing to avoid getting penalties from the IRS.