It’s not news that this has been a crazy year. Many small businesses have been negatively impacted by the pandemic. And yet, there are a number of businesses that have continued to operate profitably, some that have even thrived. Millions of government loans were received. Some businesses took advantage of tax credits and payroll tax deferrals. Millions of people were sent home to work. Others labored on through the worst of the outbreak. On top of that, our tax returns were extended into the summer, and accountants have been scrambling to keep up.
Now, as we head into the fall, we have to make sense of all this, particularly when it comes to our taxes. That’s because our tax expense generally represents one of the largest costs to our businesses and personal lives. This is why it’s critical that, if you run a small business, you meet with your accountant right now to discuss what you need to do to make sure you’re minimizing your tax liabilities for 2020.
What questions should you ask? To me, these five come to mind.
1. Are my estimated tax payments correct?
Your estimates this year were likely based on what you made last year. But throw that out the door. This year has been an unprecedented year. Maybe you made a lot less. Or maybe you had a better-than-expected year. It’s very possible that the taxes you’re paying in this year do not reflect reality. Which means you could be paying a lot less. Or even a lot more. In the end, you want to be paying exactly what you owe, so when your accountant does your return next year, there are no surprises. So revisit your estimated taxes based on your current situation and make revisions for the last quarter.
2. What’s the impact of the government stimulus on my taxes?
Did you take advantage of the Paycheck Protection Program? Good for you. If your loans get forgiven, you won’t be taxed on that. But here’s some bad news: as of now, the expenses you incurred that are eligible for forgiveness aren’t deductible either, and that can create a huge tax liability. That’s because if your revenues this year were close to last year’s, your income will be higher, and you’re likely not paying in enough estimated taxes to cover that. PPP isn’t the only government stimulus program that will impact your tax situation. If you paid employees for time off under the Families First Coronavirus Relief Act, then you’re entitled to a tax credit after the year is over. Even if you didn’t participate in PPP, you might have taken advantage of the new Employee Retention Tax Credit. If you deferred payroll taxes, you will still owe them next year. All of these things will impact your tax liability and need to be addressed with your accountant.
3. Should I put more away for retirement?
If you’re like many, you’ve probably been spending a lot less on food and consumer goods during the lockdown. If you’ve been building up some savings, it’s a great opportunity to sock some away for the future. Talk to your accountant about making more contributions to your 401(k) or IRA. Then, pass on what you learn to your employees because you want to make sure they’re putting enough away for their retirement, too. You’ll thank yourself a decade from now. So will they.
4. Should I buy capital equipment?
Economic downturns oftentimes turn up deals, and this one is no different. I’ve heard from many of my clients who are using spare cash or taking advantage of this low-interest rate environment to snap up needed equipment, furniture, technology and other capital items at steep discounts. Many of these purchases would qualify for accelerated depreciation under the Section 179 deduction, which means that a full deduction for the expense this year. That’s a huge tax savings. Are you eligible? Ask your accountant and consider investing.
5. What’s the tax impact of working from home?
You may be able to deduct more for your home office. But then again, you may owe more payroll taxes for employees who are working out of state. It’s a confusing environment right now and, depending on the specific makeup of your company and employees, you’ll need to make sure you understand if you’re facing any potential liabilities — or benefits.
Taxes are a huge expense. This year has been a hugely disruptive year. Combine those two facts together, and you’ll agree that in order to make sure you’re not facing a huge liability, you should be talking to your accountant sooner rather than later.
Article courtesy of: www.thehartford.com