The global pandemic has undoubtedly affected all businesses, no matter how big or small. Even with the CARES ACT and PPP loans, small businesses still find adapting to the pandemic cumbersome. Since Covid-19 amplifies the challenges of running a business and that as a business owner, you have to increase your profit during a global pandemic, cut your spending, and overcome financial and operational HR obstacles- we will help you set foot in 2021 with just 5 steps.
Reconsider Your Tax Structure
There are various business structures to choose from- whether you’ve started your business as a sole proprietor or as an entity structure combining pass-through taxation with limited liability Companies LLCs and S corporations. As your goals expand and your business develops, you’re bound to change your tax structure to comply with your interests. Therefore, tax structures are not constant and you can change them if they are no longer in your best interest. Lowering the corporate tax rate from 35% to 21%, the Tax Cuts and Jobs Act of 2017 (TCJA) changed tax consequences related to business structures. As a result, sole proprietorships, LLCs, and S corporations can now achieve significant tax savings by changing their tax structure to a C Corp, as C Corps’ tax benefits alleviate the impact of double taxation on their owners. However, make sure that this is a convenient tax savings trade for your business and that it is in your favor; otherwise, changing the business structure you already have may result in undesirable tax consequences.
Research Tax Breaks And Deductions
The TCJA has made a significant deduction for pass-through entity owners. The deduction amounts to 20% of QBI or qualified business income, depending on your taxable income and whether it exceeds the applicable threshold of 163.300 USD or not. There are also additional requirements in terms of when and how the TCJA 199A deduction is calculated. For example, businesses that fall out of the category of specified service trades or businesses referred to as SSTBs- can pass the threshold and still be eligible for the deduction. That being said, limitations for business types make the process more complicated as whether such business qualifies for the deduction or not. Consequently, only for either half of the business owners’ share of the W-2 wages paid by the business or a quarter of those wages plus 2.5% of their share of qualified property. So, make sure you speak to an expert before signing up to claim a deduction.
Choose A Suitable Accounting Method
Choosing your accounting method wisely is essential. There are two main methods, namely cash accounting and accrual accounting. The first accounting method records expenses when the money is paid and received, whereas the second records revenues and expenses at the time they take place. With a well-planned strategy, you can achieve what you wish for regardless of the method you carry out. For instance, anticipating your net income for the year is the first step. In case you expect your business to expand and hire new people, your net income is predicted to be lower and so is your business tax bracket. Hence, you should consider any work you undertake bordering the end of the year so that your income will be taxed at a lower rate when payments are due. On the contrary, if you predict an increase in your business revenues that will put you in a higher tax bracket, then it’s preferable to collect the revenues early during the year- that way you can benefit from your current lower tax rate.
Plan Your Tax Payment Method
As the United States tax system requires business owners to make quarterly payments, generating revenues poses a challenge and delaying payments to maintain liquidity may get tempting. However, being late in paying your quarterly taxes will have consequences manifesting in the interests and penalties charged by the IRS. The good news is that the safe harbor law can still protect you from liabilities should you meet its conditions. That is in case you miscalculate the estimates for your quarterly payments.
Make SEP-IRA Deposits
Another point to take into account when trying to lower your taxable income is to invest in a retirement account. A Simplified Employee Pension known as SEP plan will help in reducing the tax liability of your business. There is a multitude of advantages to SEP-IRA in small businesses, as these contributions are mostly tax-deductible. They’re also adjustable because you have enough flexibility to contribute depending on your business’s strength over the year. Not to mention the tax benefits since there is tax credit which goes up to $5,000 annually for three years to help small business owners prepare their employees for retirement. Nevertheless, there are different types of retirement funds and accounts, and therefore, we advise that you consult expert advisors before you decide to contribute to one of them.