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As we come to the end of 2020, we are wrapping up what has proven to be an unprecedented year. The pandemic has forever changed the way that we are doing business, and that means good year-end tax planning is more important than ever.
In this article, we’ll look at some year-end planning tips that may aid you in your business.
Review your PPP expenses
The CARES Act provided forgivable loans for businesses negatively impacted by the coronavirus pandemic. The loans were issued by the Small Business Administration and are forgivable as long as the proceeds were used for eligible business expenses, including payroll.
Payroll expenses that are paid with forgivable PPP loan funds are not considered to be deductible for tax purposes, which could have the effect of increasing your taxable income. You should consult your tax advisor to determine the potential impact this could have on your specific circumstance.
For tax purposes, expenses are considered to be deductible when paid, and income is taxable once received for cash-basis taxpayers.
Take time to project your net income situation and determine whether it would be beneficial to pay eligible expenses before year end or defer them until next year. Similarly, with income, look at whether there are clients or customers who you can invoice and receive payment from prior to December 31st or whether it would be more advantageous to wait until next year.
Payment of deferred payroll taxes
The CARES Act also included a provision allowing businesses to defer the employer portion (6.2%) of payroll taxes incurred between March 27, 2020 and December 31, 2020. One half of the payment must be paid prior to December 31, 2020, while the remaining portion must be remitted prior to December 31, 2022. Now is the time to start planning when the best time will be to take care of the outstanding liability.
Maximize the benefits of current-year losses
While 2020 has been a tough year for many small businesses, current legislation provides some positive benefit for business owners experiencing tax losses. The CARES Act provides authorization for some small businesses to carry back losses experienced in tax years 2018, 2019 and 2020 to the five previous tax years.
By amending a prior year's tax return, business owners have the ability to potentially receive a refund more quickly, which can provide your business a much-needed cash-flow injection during these uncertain times.
Review of retirement-plan contributions
If your business does not currently have a retirement-savings plan, now may be the time to have one established. In addition to IRA accounts, small-business owners are also typically eligible to contribute funds to 401(k) plans, SEP IRAS profit sharing plans and other types of retirement accounts.
While business owners will usually have until the filing deadline (including extensions) to make contributions to a retirement account, many plans must be established prior to December 31 in order to be eligible for contributions in the current year.
Michel Valbrun, CPA, is an award-winning author and speaker from Florida. He is currently the President of Valbrun Group, a professional services firm with its roots in tax planning, outsourced CFO services and financial consulting.