The dreaded word “taxes” conjures up images of bottomless piles of paperwork, lengthy meetings with tax professionals, and sending hard-earned money off to the government. While it’s not possible to escape taxes (that would be fraud), this season can be much more bearable with some tax planning strategies.
Ever heard the phrase, “the sooner, the better?” This phrase applies directly to tax preparation, and what we mean is that the sooner you can begin this process, the better it will be for you later in the year. Remember, it is never too early to implement tax planning strategies to set you up for a successful end of the year.
It doesn’t matter if you are part of a small business or a large corporation; every company is responsible for filing taxes each year.
With this in mind, tax planning can help you avoid stress when the deadline comes around to file your taxes. If you have a plan in place and the help of a trusted and experienced advisor, you can file your business taxes with confidence.
This is a year-round process of tax preparation and can be segmented into manageable steps. Let’s breakdown how taxes affect businesses and what benefits may apply to your company.
What Is New For 2020 & Beyond
For the past two years, the IRS worked to implement the Tax Cuts and Jobs Act (TCJA), and now it is in full effect. Therefore, it is crucial for business professionals to understand how this tax legislation can impact their companies.
If you own a service business or employ consultants who travel to clients, these work-related expenses are no longer deductible. Since the implementation of TCJA, there has been a loss of miscellaneous itemized deductions like home office costs, work-related legal fees, and business expenses such as travel costs. These changes may negatively impact small businesses, as employees migrate to more prominent companies who can afford to cover these expenses.
In Sec. 199A business income deduction which provides business owners, other than C-corporations, with a 20 percent deduction on qualified business income. Exclusions include wage-earning, investment income, and guaranteed payments. However, this could be a large deduction for many business owners.
By starting your tax planning now, you have ample time to find tax credits and deductions for your business.
What You Need To Know: Tax Planning Tips For 2020
Apart from the obvious (aka tax returns due in April 2020), there are a few other key points to remember:
- Arm yourself with good information. A business may be required to pay several types of taxes depending on the industry they are in and what specifics apply to their company.
- Money in the bank. It is crucial to understand that having money in the business account is imperative when it comes time to pay taxes. Insufficient funds will be penalized by the IRS.
- Have the appropriate paperwork. This paperwork should include the proper reports that have been analyzed by an advisor. All of this should be organized so that in the chance of an audit, everything is easily accessible for reference.
- Ask for help. If any of this advice seems daunting, there are qualified professionals, like those at Signature Analytics, who can help in the tax planning and execution process.
According to Fundera, in 2019, the small business tax rate is a flat 21% for a C-corporation, down from a schedule in when the highest corporate tax rate was 39.6%. The average small business tax rate is 19.8%. Based on their entities, businesses will pay different amounts in taxes. Here is a sample breakdown:
- Sole proprietorships pay a 13.3% tax rate
- Small partnerships pay a 23.6% tax rate
- Small S corporations pay a 26.9% tax rate
- C corporations pay 17.5%
The IRS has stated there are other changes to tax law, including standard mileage rate. In 2019, each mile of business use is 58 cents per mile to operate a car, van, pickup, or panel truck.
There are a few different small business taxes that will vary based on the structure of your business.
- What types of taxes that will need to be paid
- The amount of money to be paid to these taxes
- When the payment for these taxes is due
- How you will pay the taxes
You have time to plan and research all of the details or reach out for professional guidance as well.
Tax Planning Strategies: What To Know And What To Avoid
Not only is it essential to have tax planning strategies in place, but it’s vital to have a trusted advisor to turn to for questions, accurate reporting, and detailed information on tax laws. This will be different for every person based on their business and goals, so make sure to have a good idea of what yours are.
Part of planning out your strategy should include knowing what your tax deductions, what taxes are due quarterly, and mistakes to avoid.
The most common tax deductions include vehicle expenses, insurance, and rent. If you are a new company, you may also qualify for a startup cost deduction. Depending on the accounting system your company has in place, you may also be eligible for inventory or business loan interest deductions. Arm yourself with information so you can capitalize on any deductions possible.
Read More: End of Year Checklist
Knowing what strategies are to avoid is just as, if not more, knowledgeable that knowing what to execute. Below are some tax planning mistakes to steer clear from:
Failing to have enough cash
One of the most common mistakes we see businesses make is not having enough cash in the bank to cover their taxes when they are due. The company may then be assessed penalties, resulting in owing more than your business initially planned for and tapping further into your well.
Failing to report trackable income
Companies that employ or operate as independent contractors must report trackable income. If you have done more than $600 in business for a client, they are obligated to send you a 1099. And since this number also gets sent to the IRS, you are obligated to report it when filing your taxes. Don’t try to fudge numbers on how much you’ve made – the IRS takes this seriously.
There is a fine line between maximizing your deductions and going overboard. With the Tax Cuts and Jobs Act, fringe benefits like team outgoings, travel, and work-related entertainment are 100 percent non-deductible. The last thing you want is to owe the IRS more money or pay the penalty for any mistakes.
While claiming too many expenses can signal a red flag to the IRS, you don’t want to miss deductions that you are entitled to claiming. Here are some common examples of deductions that you don’t want to miss out on:
- Startup costs: You can claim up to $5,000 for expenses related to getting the business up and running.
- Lifetime Learning Credit: This allows you to deduct up to $2,000 a year based on 20% off the first
- Education: $10,000 spent on education after high school. You don’t have to be working on a degree to claim a deduction – it can be for classes related to your business.
- Business services: Anything that helps your business run, from PayPal to your Wi-Fi plan can be deducted.
- Inventory: Owners can claim deductions for unpaid goods. This does not apply to services, unfortunately.
- Loans and credit cards: If you rack up interest for business purposes, it can be deducted.
Get In Touch With A Professional Tax Advisor
Getting to the tax planning party early is recommended. The more mindful you are throughout the year will reduce your stress and help keep your business organized. We highly suggest this to all of our partners.
If your company does not currently have a tax advisor and trusted CPA, now is the time to find one who is well-versed in your industry. Since your taxes can make a financial impact on your business, it’s critical to go to someone with experience.
If you have any questions or uncertainties regarding what you should expect from your tax advisor, you should read our guide.
Contact us today to find out how our services can help your team build a tax planning strategy.
Sources: Harvard Business Review. (2018). End the Corporate Health Care Tax.