Small and mid-sized businesses are now living in the Golden Age of Taxation. The past few years have brought significant changes to the tax code, altering how business owners must plan for taxes to stay competitive.
There’s no telling how long some of these opportunities will last. The code continues to change dramatically. We always say to our clients:
It’s not what you make. It’s what you keep.
Here are the top 10 small business tax tips, opportunities and business strategies you need to consider in the Golden Age of Taxation to reduce your tax liability and improve business income.
R&D Tax Credits For Small Business
Research & Development (R&D) tax credits are lucrative for companies that undertake or sub out any design work. Specifically, manufacturing, construction, engineering, architecture, software, and tech firms can benefit significantly from these credits.
You can take the R&D tax credit every year. But you can also look back on the prior three to four years and reclaim unused credits, offsetting the taxes you’ve already paid.
The result? A nice, surprising refund you can reinvest back into your business.
Entity Structure Planning
More often than not, entity structure is a major consideration for a company at formation. But it’s never looked at again as the company’s situation changes — along with the ever-changing tax code.
This results in substantial missed opportunities to optimize entity structure and minimize taxes. For example, C-corporations have the least flexibility in tax planning. They’re typically not the best choice in the current landscape.
The importance of entity structure choice is amplified when business owners are considering their exit. In many cases, owners consider this too late and overpay their taxes significantly. Proper and timely planning allows for optimization of entity structure — for whatever the future holds.
There are many tax consequences when small business owners take money out of their business, whether it be W2 income, distributions, guaranteed payments, dividends, etc.
The nature of the qualified business income dictates income taxes and employment taxes the company and business owner pay.
The best strategy requires an analysis to determine the most efficient compensation structure that minimizes taxes. This can be completed throughout the year or during your end of year tax planning.
Accounting Method Changes: Accrual vs. Cash
The Tax Cuts and Jobs Act of 2017 outlined new rules for small businesses, defined as under $25 Million in 3-year average annual revenue. One of those rules allows companies more flexibility when it comes to how they report income and business expenses.
Companies can elect to change methods that could provide a one-time significant deduction in the year of the change and ease in reporting going forward.
Like the accounting method changes, small businesses can look at different ways to report inventory on a tax-basis using internal inventory policies.
This could allow for ease in reporting and potential one-time deduction for expensing a portion of your inventory.
Cost segregation is a strategy for real estate owners, allowing for significantly accelerated depreciation deductions through the segregation of building components.
Depending on the type of building, you can look forward to anywhere from 20 percent to 70 percent of additional year-one depreciation through a cost segregation analysis.
The CARES Act brought back the ability to carry back losses generated between 2018 and 2020 and offset tax in the five prior tax years. 2020 is the last year to take advantage of this.
There are multiple ways to generate losses, including the prior three strategies just reviewed.
Payroll Tax Deferral
Employers have another opportunity through the CARES Act to defer employer payroll taxes in 2020, to be paid 50 percent in December 2021, and 50 percent in December 2022. This may allow for some additional cash flow for troubled businesses.
These two real estate strategies allow for business tax deductions and credits for meeting specific energy efficiency standards in construction.
For businesses with a substantial amount of exports, this is a fantastic strategy to consider to pay lower tax rates on a portion of that taxable income.
Take Full Advantage of the Golden Age of Taxation Today
I love overpaying on my business taxes!
Said no business owner, ever. Take advantage of the above small business tax tips and you will achieve tax savings.
Stop overpaying on your taxes today. We’re now living in the Golden Age of Taxation, where there are numerous instruments for lowering your tax burden as a small or mid-sized business owner. While on it, make sure you’re claiming home office deduction by multiplying eligible home expenses by the portion of your home used for business. Remember, it’s always the best idea to consult a tax advisor before writing off a business expense.
Talk to a tax professional about how you can save on your taxes. Contact us today at Cunningham and Associates, and we’ll get you started with beneficial tax strategies tailored to your unique situation and business objectives.