The COVID-19 pandemic that began in early 2020 exerted multiple impacts on businesses in Utah – many of them, unfortunately, that are still going on. But as tax season approaches, there could be some relief. As a financial advisor in Utah, I see many smart tax strategies overlooked every year.
Some aspects of tax planning have changed due to government actions designed to deal with COVID impacts, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Other strategies can be applied every year, pandemic or not, but can be especially helpful if your business or your income (or both) were affected by COVID.
In assessing new tax planning methods, it’s always wise to consult your financial advisor and tax professional. Rules and regulations on taxation change frequently, especially in times of crisis, and they can be very complex. Specifically for business owners. Taxes are an essential part of a solid financial plan, and at Rock House Financial, we help clients incorporate smart tax planning strategies to maximize their income and keep more of what they have.
Taxes have been a common topic lately, as we review plans and prepare for a new year. Below is a brief overview of tax-planning strategies for your business and yourself going forward. If you have a question that we don’t address here, schedule a time to talk with our team. A no-obligation conversation can go a long way.
This year, some of the strategies you can incorporate into your taxes are directly linked to the pandemic.
One of the government’s COVID-interventions has been a loan program for affected businesses called the Paycheck Protection Program (PPP). If you received one of these loans, you should know that, given the lingering effects of COVID-19, the Small Business Administration (SBA) has updated the forgiveness period.
Your covered period may be either eight weeks or 24 weeks. Your application is submitted after the covered period ends. If you have spent the loan funds, you can submit the application prior to the end of the covered period.
Effects of the CARES Act
If your business incurred losses in 2020, you can utilize current losses against past income under the CARES Act. Net Operating Losses (NOLs) stemming from 2018, 2019 and 2020, may be carried back five years for refunds against taxes filed.
Second, the CARES Act sped up the timeline for the corporate Alternative Minimum Tax (AMT), which was repealed by the Trump Administration’s Tax Cuts and Jobs Act (TCJA). Companies could claim all their non-used AMT credits in the tax years between 2018 and 2021.
Another point to consider: Under the provisions of the CARES Act, companies may defer payment of the 6.2 percent Social Security taxes for 2020, and pay instead by the end of 2021 (50 percent of the tax due) and the end of 2022 (the remaining 50 percent due). It’s important to weigh the effects of the deferment versus the tax deduction benefit of paying the tax earlier than allowed, however. Talk to your financial advisor about how each option would affect your situation.
Helpful Strategies in the Year of COVID
In addition to COVID-stemmed strategies, there are a number of other strategies that could be particularly helpful in the year of COVID. The methods below may be helpful for your business, depending on your eligibility.
The Health Care Tax Credit
If you employ less than 25 full-time workers whose average salary is below $50,000 annually, and the company pays at least 50 percent of their health-insurance premiums, you may be eligible for the Health Care Tax Credit.
Section 179 Property Tax Deduction
If you have Section 179 property, the deduction can include as much as $1 million of eligible property for business. It can only be deducted fully in the year the business starts using the property, so this can be particularly helpful if the business moved in 2020 or if you purchased new business-use property last year.
The Work Opportunity Tax Credit
Your business may be eligible for the Work Opportunity Tax Credit if you hire veterans, the disabled or other specific groups. You may be eligible to receive as much as 40 percent of the first $6,000 of qualified wages to recently hired individuals from one of the included groups.
Child Care Expense Credits
If your company pays childcare expenses for employees, you may be eligible for a tax credit of 25 percent of the expenses you pay, with a limit of $150,000 annually.
Pension Startup Cost Credit
If you initiated a pension plan for company employees in 2020, you might be eligible for the Pension Startup Cost Credit. The credit is capped at $500.
Potential Deductions for Business Owners
Last but not least, don’t neglect tax-planning strategies for your own personal taxes. The TCJA significantly increased the standard deduction for personal taxes, almost doubling the amount for many groups. But that doesn’t mean that itemizing deductions won’t be beneficial, depending on the number of potential deductions you have.
Here are some potential deductions to be aware of:
Miscellaneous Deductions for Business Owners
As a business owner, you are eligible for multiple tax deductions, including periodicals purchased specifically for business purposes, business travel (this type of travel was allowed in most states last year) and business card ATM fees.
Many businesses (and individuals) have increased their charitable contributions in the year of COVID. Be aware that business owners are allowed to claim any contributions made by the business as an itemized deduction.
If your business is structured as a sole proprietorship, a partnership, a Limited Liability Corporation (LLC) or an S-Corporation, charitable contributions are not deductible expenses for the business itself, however.
Read our recent blog post (Donating to Charity? Rock House Financial Shares 6 Ways to Do So), then contact our team to see how these options work specifically for your situation.
Health Insurance Premiums
You may also be able to deduct the cost of your individual health insurance premiums if you pay them out of pocket, depending upon your total healthcare expenditures for the year.
How Rock House Financial Can Help
Tax planning can be complicated during uneventful years. Because 2020 was definitely not that, this may be the year you reach out for help. Remember, taxes are important heading up to April 15, but smart tax planning is something that can be incorporated into your financial plan all year long. Rock House Financial can help.