Small Business Tax Tips and Considerations for 2021, Part 1
The first several months of the year always bring about many tax questions as businesses and individuals plan to file their taxes and pray they have planned and saved enough to foot the bill. The truth is, taxes should be a topic you think about and discuss all year, not just during tax time. We have included some common questions and responses we are receiving this year. The first one is unique to our current filing season but others are questions we receive regularly.
4 Tax Tips & Considerations for 2021
1. How does the COVID-19 or disaster loans have any impact on taxes?
The COVID-19 loans that were provided under the CARES Act, were the Paycheck Protection Program (“PPP”) and the Economic Injury Disaster Loans (“EIDL”). The PPP loan is a loan that can be forgiven as long as the proceeds were used for payroll and other qualified expenses during the covered period. Once those requirements have been met then an application can be filed for the loan to be forgiven. (If the loan is $150,000 or less the application process is streamlined.) Once the loan is forgiven, the loan proceeds are not taxable for federal income tax purposes and the deductions for expenses paid with forgiven PPP loans are allowable as clarified by the Consolidated Appropriations Act of 2021 enacted on December 27, 2020. This tax treatment applies to first and second draw PPP loans.
However, at the present moment the State of California is not allowing businesses to deduct expenses paid for with forgiven PPP loan proceeds. California is considering legislation in regards to the tax deductibility of expenses paid with forgiven PPP loans for state purposes. California businesses that received PPP loans are being advised to put the tax return on extension until the taxability is determined for state purposes.
In regards to the COVID-EIDL, this is a 30-year loan offered by the Small Business Administration, (“SBA”) to assist businesses with working capital and operating expenses that will need to be paid back. If your business received an EIDL and used the loan proceeds during 2020 on valid business expenses, those expenses are deductible for Federal and State purposes.
2. Considerations to save money?
Saving money is always an issue for small businesses due to the fact that running a business requires a steady flow of cash. Businesses are required to spend money in order to make money. You can look at reducing business expenses wherever possible by looking to secure the best deals on purchases of product and supplies or by making only essential business purchases. However, business owners should look at the bigger picture and think about saving money for long-term retirement. Saving for retirement will not only help provide income in the future (to the individual saving), it can also reduce a business owner’s tax liability.
The small business owner has some options in regards to retirement plans. These plans will include the owners of the business and the employees. The SEP-IRA is version of the IRA that allows for a contribution that cannot exceed the lesser of 25% of an employee’s and/or owner’s compensation up to a cap of $58,000 for 2021. For a sole proprietor that could be a potential $58,000 deduction against taxable income. Here’s a link here to a Fidelity Investment site that provides additional information regarding plans available to small business and contribution limits. https://www.fidelity.com/retirement-ira/small-business/compare-plans. As you will see, there are lots of options for business owners to save for retirement.
If you are a business operating in the state of California and have 5 or more employees you will be required to register with Cal Savers by June 30, 2022 and start offering either an employer sponsored retirement plan or have Cal Savers administer the plan for you.
Please note that when considering any retirement plans you will need to consult with your tax advisor in regards to implementing the plan and maintaining the plan.
3. Important tax deadlines
In pre-COVID years, everybody knew April 15th as the individual tax filing deadline however, the COVID-19 pandemic has altered that date. For the tax year ending December 31, 2020, the deadline to file your federal and state individual income taxes will be May 17, 2021. Please note that the due date to make the first quarterly estimated tax payments for the tax year 2021 did not change and the estimated tax payments will still be due April 15, 2021. The due date to file a regular corporation tax return did not change and the filing due date is still April 15, 2021 for the tax year ended December 31, 2020. If you have received a PPP loan and it has been or will be forgiven then you will probably want to put your tax return on extension due to the issue of the state taxability of the loan forgiveness still being determined by the state legislature. By filing an extension for your individual income tax return you will have until October 15, 2021 to file.
4. Tips to help taxpayers file their taxes efficiently:
The most important step as a business owner to getting your taxes filed efficiently is to not have a HUGE tax bill come as a SURPRISE at year-end. There are 2 reasons this can occur. 1) The businesses bookkeeping and/or recordkeeping are not kept up to date on a regular basis or 2) the business owner is not consulting with their tax professional (or they don’t have a tax professional). At Avaunt, we communicate with our clients throughout the year, either assisting them with their recordkeeping, consulting with them on their business issues and schedule regular tax planning check-ins to ensure adequate quarterly estimates are being made on time. Then, when it comes time to file tax returns, there are no surprises and the business owner has a good idea of what the tax liability will be prior to completing their return.
We recommend you seek advice from your tax professional. If you’re a small business and you aren’t working with an Accounting Firm, consider giving our firm a call. We have experts that will work with you to understand your business and consult with you throughout the year regarding your business and tax situation.
Avaunt Ltd. CPA’s and Consultants