CPAs listen up: regardless if you’re helping an international business or a mom-and-pop shop manage their budget, the math is simple. You should always calculate how much money you can save your clients. Here are the top nine most notable ways CPAs can reduce business taxes in 2021.
1. R&D Tax Credits
Research & Development tax credits are very 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.
These credits can create a substantial cash infusion using a 3-year lookback to offset taxes paid in prior years, with the ability to continue taking the credits annually moving forward. Look for a no-cost assessment with a third-party tax firm to ensure the opportunity is right for your client.
2. Entity Structure Planning
More often than not, entity structure is a major consideration for a company at formation. But it’s often never looked at again as its situation changes along with the ever-changing tax code. This results in substantial missed opportunities to optimize entity structure and minimize taxes.
C-corporations have the least flexibility in tax planning. Typically, they’re 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 think this too late and overpay their taxes. Proper and timely planning allows for the optimization of entity structure for whatever the future holds.
3. Balanced Compensation
There are many tax consequences for how a business owner takes money out of their business, whether it be W2 income, distributions, guaranteed payments, dividends, etc.
The nature of the income dictates income taxes and employment taxes the company and the 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.
4. Accounting Method Changes (Accrual v 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 expenses. Companies can elect to change methods, which could provide a one-time significant deduction in the year of the change and ease in reporting.
5. Inventory Reporting
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 the inventory.
6. Cost Segregation
The cost segregation strategy for real estate owners allows 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 to 70 percent of additional year one depreciation through a cost segregation study.
7. NOL Carryback
The CARES Act brought back the ability to carry back losses generated between 2018-2020 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 previous three strategies just reviewed.
8. 179D, 45L
These two real estate strategies allow for deductions and credits for meeting specific energy efficiency standards in new construction or improvements. There are some significant differences between the two.
For businesses with a substantial amount of exports, this is a fantastic strategy to consider for paying lower tax rates on a portion of that income. It’s a separate entity that earns a “commission” on your export sales based on the greater of 50 percent of net income on sales of qualified export property. Or four percent of gross receipts from qualified export property sales.
10. Employee Retention Tax Credits
The new stimulus bill has reversed some provisions in the original CARES Act. Most, if not all, businesses will now meet the qualification criteria for the Employee Retention Tax Credits.
Business owners can get a $5000 tax credit for every full-time employee on the 2020 payroll — whether they received PPP funds or not. Moreover, the new provision extends into the first quarter of 2021 and actually increases eligibility to $7000 per employee.
For CPAs, we recognize there might be an advisory conflict or a bandwidth issue here. So with that in mind, C&A has formed a dedicated ERTC Study Team. Our team will:
- Calculate and document the rationale and methodology for your clients
- Submit all forms, including preparation as required
- Coordinate with payroll companies
- Monetize the credit
Creative Ways for CPAs to Reduce Taxes: A Key Takeaway
A capable CPA can reduce business taxes and help companies keep more money in their coffers. As a CPA, you don’t have to be an expert in R&D Tax Credits or all of the creative ways you can save your clients money. That’s what we’re here for.
Contact us at (508) 797-5003 for how you can deliver excellent results for your clients.