It’s drawing ever nearer to the most stressful part of the year for business owners – tax season. There are so many forms (both federal and state) that must be properly calculated and filed. If you’re not “a numbers person,” tax season is probably your worst nightmare! Luckily, there are some tax planning tips for businesses that can help.
While the stress seems inevitable, following the proper steps can at least ease this stress. These steps include understanding the different aspects that impact your business’ income. As a small business owner, there are also tax credits you might be eligible for. In this article, we’ll cover some of the basics that will help tax planning for your business.
How to Start Tax Planning for Businesses
There are a few things that can greatly impact your business’ taxes. Something that seems simple (like the location of your business) can even affect your city and local taxes. Many business owners work with an advisor when setting up their business, and therefore don’t really know their business’ structure. However, this is an important part of understanding your business’ taxes and planning for tax season.
Business structures impact income taxes and how they’re calculated. There are also some tax benefits for some of the types of business structures. So, before we move into further tax planning, let’s get a full understanding of the basis of your business’ income taxes – the business structure.
Types of Business Structures
Business structures (or their type of “entity”) greatly impact both income taxation and owner liability.
Here are some of the most popular business structures:
- Sole Proprietorship: A sole proprietorship means you conduct business activities but don’t register as any other type of business. This means there’s no separation between personal and business assets and liabilities.
- Partnership: A partnership is a business structure for two or more people that own a business together. In Limited Liability Partnerships, all partners in the company have limited liability.
- Corporation (C Corp): Corporations are completely separate from the owners – they can even be held legally liable. This type of business structure offers the most protection to the owners. On the other hand, they do have to pay income taxes on their profits (twice in some instances).
- Limited Liability Company (LLC): A limited liability company lets you keep your personal assets separate from your business assets. An LLC combines aspects of a limited liability partnership and a corporation. This is a very popular type of business structure.
- S Corp Corporation: This type of corporation allows some profits and losses to go through the owners’ income. This way, the amounts aren’t subject to higher corporate tax rates. The intent behind this business structure is to avoid the possible double taxation issue that we mentioned for regular corporations (C Corps).
For a full overview of all business structures in further detail, visit the Small Business Administration’s page, choose a business structure. Now let’s take a look at the tax advantages of each type of business structure.
Tax Advantages of Business Structures
As we previously mentioned, there are also some advantages to certain business structures. When tax planning for businesses, it’s important to keep these things in mind and learn about the pros and cons of each before deciding. This way, you can update your business’ structure as needed. Working with an advisor on these aspects of your business will help you make the best decisions.
- (LLC): LLCs allow businesses to pay a lower tax rate than they’d have to under a corporation. These businesses also do not have to pay income taxes on their profits.
- (C Corps): Unlike the popular LLC, Corporations are allowed to sell stocks to raise revenue. Corporations are also different from the other business types on our list because they have to pay income taxes on their profits.
- (S Corps): These types of corporations have the benefit of avoiding the double taxation issues mentioned for C Corps.
If your business structure isn’t correct (or you feel like it’d be beneficial to change) it’s possible to change your structure. A change in structure could benefit your business and tax planning for businesses. Meet with a professional to see if this is a good move for your business.
Other Advantages to Consider
- Owners of Pass-through Entities: According to TCJA’s Sec. 199A, sole proprietorships and owners of pass-through entities can claim a deduction. The deduction equals 20% of qualified business income (QBI). Under the rules of this deduction, the limit for your 2020 taxable income cannot exceed $163,300.
- For Businesses That Moved: There is a deduction available for eligible business property. Under Section 179, you can deduct up to 1,000,000 dollars of your business’ property. Read the full details about this deduction here.
Other Tax Breaks Available Under TCJA
Under the Tax Cuts and Jobs Act (TCJA), there are some other deductions business owners can utilize while tax planning. This includes meals, transportation, and similar employee reimbursements. These changes mean the following deductions might be applicable for your business under the TCJA.
- Business-related Meals: Any business-related meal expenses are 50% deductible. This includes meals while traveling for business.
- Transportation: Employers can only deduct commuting transportation costs if it’s done for the employee’s safety. i.e. The employee must require a transportation service for commuting for safety reasons for it to be tax-deductible. Transportation expenses are 100% deductible for business travel.
Now that we’ve covered the business structures and their different tax advantages, let’s get into other ways you can minimize your taxable income and optimize tax credits.
Claiming Tax Credits
Proper planning for your business’ taxes includes finding any available tax credits or deductions. Tax credits are a great way to reduce your business’ taxable income and save you money overall. We’ll cover some of the better-known credits, but you can work with a qualified CPA to find additional credits available to your business.
- Health Care Tax Credits: This is a very specific tax credit for small businesses. To qualify, employers have to meet some small business qualifications. First, employers must have fewer than 25 full-time employees. The average salary paid must also be less than $50,000 per year. Lastly, the employer must pay at least half of the health insurance premiums.
- Deduct Health Care Premiums: To qualify for deducting your health care premiums, your company must have an individual health plan (group plans not eligible). Your business also has to pay for employee’s premiums without any tax breaks. If your company meets these requirements, you can claim the premium amounts as income deductions.
- Work Opportunity Tax Credit (WOTC): If you hire certain individuals from vulnerable communities within certain target groups, you may be eligible for the Work Opportunity Tax Credit. Businesses can receive up to 40 percent of the first $6,000 of the employee’s qualified wages. Target groups include Veterans, ex-felons, and SNAP recipients to name a few.
- Charitable Contributions: Sole proprietors, partnerships, LLCs, and S-corporations can’t deduct charitable contributions. The business owner, however, can claim them as an itemized deduction on Form 1040 for these business structures.
- Child Care Credits: If your company helps pay for employee’s child care costs, you may be eligible for this credit. The childcare tax credit is 25% of the cost (up to $150,000).
While this covers some of the deductions and credits, it doesn’t cover all of them. This also doesn’t cover the COVID relief programs for small businesses. In 2020, you may have taken advantage of one of these programs – a PPP Loan. Now let’s see how your business may be affected by the PPP loan and how to see if your business meets the qualifications for loan forgiveness.
If You Took Out A PPP Loan In 2020
There has been some confusion around the PPP loans offered to small businesses in early 2020 amid COVID. The reason being, the loan was original described as being “forgivable.” However, this changed in April 2020. When tax planning for businesses, this can be a frustrating area to try and account for – especially if you’re not sure whether or not you qualify for loan forgiveness yet.
The terms for forgiveness were last updated in late December of last year. Essentially, there are certain guidelines your small business can qualify for that will still make the PPP loan forgivable. Here is the application on the Small Business Administration’s website, along with details on loan forgiveness. If you’re not sure whether or not you qualify, meet with your accountant or CPA and look at the SBA’s guidelines.
Now Start Your Tax Planning
Now that you know the basics of proper tax planning for businesses, start your planning! Remember to start by checking your business’ structure. If there are changes that would better your tax setup, consider meeting with a CPA to discuss this change.
Start planning now and follow our steps to ensure smooth sailing through those rough tax waters.