When you're running a small business, you might feel like you're responsible for everything – marketing, product development, payroll, and, of course, taxes. Some basic knowledge of the tax system can go a long way toward navigating this annual process, but there is no replacement for an expert.
If you aren't ready to hire a professional, consider using one of the best accounting software providers to guide you. If you prefer handing responsibility over to a professional, consult your tax prep specialist for insight and follow these tips to make it through the season.
COVID-19-related changes to tax laws
In March 2020, the IRS implemented policies related to COVID-19. Paid sick leave should be provided for workers for up to 80 hours, and expanded child care leave should be given when "employees' children's schools are closed or child care providers are unavailable."
As an employer, you can expect 100% reimbursement for the leave with no payroll tax liability. Small businesses with fewer than 50 employees are eligible for an exemption from expanded child care leave when it would threaten the business's viability, and there are provisions to make the reimbursement quick and easy to obtain.
Keep in mind that if you did not supply this paid sick leave to your employees, you may be asked to document how it would have impacted your ability to stay solvent.
Steps to save on your taxes
1. Take advantage of accountable plans.
Accountable plans allow employees to deduct certain business expenses. If you log these expenses so your employees can deduct them later, it serves as a nice perk for your workers. It may also lower your total tax costs.
Here are the general rules for a compliant accountable plan:
- Expenses must be incurred for a legitimate business purpose.
- Expenses must be incurred within a reasonable period of time.
- Any funds not used must be returned to the employer within a reasonable time period.
If these standards aren't met, the reimbursements are taxable.
2. Stay on top of adjusted gross income.
One of the most important tips is to pay attention to your adjusted gross income. Your adjusted gross income directly impacts the deductions and credits your business is eligible for. While the particulars of how to calculate this figure depend on specific tax laws, you should be aware of it as you plan for tax season. Check with your accountant or third-party tax partner for specific guidance.
3. Track receipts.
Maximizing your deductions requires knowing how you spent your money throughout the year (which is also helpful for understanding cash flow). Organizing and tracking receipts makes it easier to log deductions correctly and submit an accurate return. If your business is audited, those receipts and proof of your expenses validate that costs were reported properly.
Keeping track of every transaction can be complicated, so it's important to review the features of accounting software and select a provider that can make tasks like tracking receipts a much faster and easier process.
4. Avoid penalties from late payments.
Getting your documentation together early in the year can prevent last-minute filing and unforeseen expenses. Short-term working capital and business tax debt loans can help you cover tax payments and avoid late fees.
5. Consider restructuring.
When formally launching a business, you must decide what business entity to establish. The type of entity you choose will have its own taxation policies and deductions, not to mention which income tax form you use to file your taxes. It's a good idea to revisit your business structure every few years to see if reclassifying it makes sense based on your goals and financial bottom line.
6. Use tax preparation and filing software.
Most tax preparation and filing software automatically accounts for tax laws and rules. This can simplify filing for you, reducing the likelihood of errors and making it easier to take full advantage of the opportunities at your disposal. For some business owners, filing software is one of the simplest and most cost-efficient ways of completing a tax return.
7. Take advantage of Section 179 opportunities.
The Section 179 deduction allows businesses to deduct the full purchase price of qualifying assets financed during the tax year, so it's useful for businesses in need of new equipment. The deductions from your gross income help maximize the value of business equipment purchases and similar investments by lowering your overall tax cost basis. As with any tax law, however, there are rules and limitations to be aware of.
8. Don't ignore benefit plans for employees.
You can take a tax deduction on your business tax return for the cost of providing benefits to employees. Learn more about the types of benefits you can deduct and any restrictions or limitations on those benefits from the IRS Employee Benefits page.
9. Remember your Paycheck Protection Program loans.
If you are one of the many business owners who received a PPP loan, keep in mind that the IRS announced in December 2020 that any eligible expenses covered with funds from your loan are deductible.
If you haven't done so already, get PPP loan forgiveness from the Small Business Administration to ensure you aren't responsible for repayment. Issued as a part of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, PPP loans were designed to be forgiven as long as borrowed funds were used to pay business expenses such as payroll, rent and utilities.
Accounting software to help during tax season
Using accounting software with built-in tax features can help enormously with small business tax preparation, even if you decide to consult with a tax professional. Here's a couple of our favorite accounting software options that can help with taxes.
- Oracle NetSuite: This full accounting software package includes tax management tools that can manage both domestic and global taxes. Read our full Oracle NetSuite review for more information.
- FreshBooks: This software is among the best for reporting business taxes, making it simple to keep track of tax summaries, expense reports, and profit and loss reports. FreshBooks also makes it easy to export each report you create. Read our comprehensive FreshBooks review for more information.
The importance of preparing for tax season
Each year brings a new wave of tax laws. Tax law changes are often unpredictable and can significantly impact your deductions and return. A new year could bring positive changes due to a particularly business-friendly policy environment, or it could mean inflated costs and pressure to change how you manage your books.
Speak with an accounting professional to make sure you understand specific tax issues and changes that are relevant to your business. However, if you follow the best practices and tips we've outlined, you'll set yourself up for success when filing this year's taxes.