As we approach the tax season, here are a few small business tax planning strategies you should consider in coordination with your tax accountant.
1. Consider a tax status change
As a small business owner, you can structure your business as a sole proprietor, partnership, limited liability company (LLC), S corporation or C corporation. Your business structure will impact how to file taxes for small business owners.
If you’ve outgrown your current business structure in the past year, you may be able to change to one that’s a better fit. For example, LLCs can elect to be taxed like a C corporation by filing Form 8832 with the IRS.
Corporations vs. pass-through businesses
Pass-through businesses, such as sole proprietorships, partnerships, LLCs and S corporations, don’t pay a corporate income tax. Instead, the company’s net income “passes through” to the owner’s individual tax return, where the highest tax bracket is 37%. For LLC members in the top tax bracket, a tax status change can result in significant tax savings.
Of course, tax savings should not be the only factor for selecting a structure for your small business. Prior to changing your tax status, consult your tax accountant to analyze the numbers across the various options.
2. Take advantage of tax reform
The Tax Cuts and Jobs Act of 2017 (TCJA) created the qualified business income (QBI) deduction, which provides pass-through business owners a deduction worth up to 20% of their share of the business’s income — though it does come with many rules and limitations.
If your business is a specified service trades or businesses (SSTB), your QBI deduction starts to phase out once your total taxable income exceeds a certain amount. If your business isn’t an SSTB, but your total taxable income is above those upper limits, you can claim the deduction, but it’s limited to:
- 50% of your share of W-2 wages paid by the business; or
- 25% of those wages, plus 2.5% of your share of qualified property
Talk to your accountant if you think you might qualify.
3. Leverage coronavirus tax relief
Congress has passed several pieces of legislation in the past two years to help small business owners through the COVID-19 crisis, including:
- Families First Coronavirus Response Act (FFCRA)
- Coronavirus Aid, Relief and Economic Security Act (CARES)
- Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA)
- American Rescue Plan Act of 2021 (ARP)
Some provisions of these laws that impact small business owners include:
Employee retention credit
Businesses that kept idle workers on payroll during the pandemic may qualify for a tax credit to help offset the cost of employee wages and health plan costs.
Paid leave tax credits
Recent legislation made it more affordable for businesses to provide paid leave to employees.
Sick and family leave credits
Employers who pay employees while out on sick or family leave can receive a fully refundable tax credit for wages paid through September 30, 2021.
Paid leave credits for vaccines
The American Rescue Plan Act expanded the sick and family leave credits to include providing paid time off to employees to get a COVID-19 vaccination, recover from the vaccine, accompany a family member getting a vaccine, or care for a household member recovering from the immunization.
Charitable deductions for donated inventory
The CARES Act also temporarily modified the rules for businesses that deduct donations of unused inventory. For 2020 and 2021, businesses can deduct 25% of the business’s taxable income used towards donation of food inventory.
Remember, please consult your tax accountant prior to making any tax decision.