Preparing for 2021: Tax Planning Strategies for Small Business Owners
Life as a small business owner is an upward battle. In a world dominated by corporate companies, it can be difficult to rise above and achieve success. 2020 did not make this any easier. With the consistent changes to rules and regulations of operation caused by the coronavirus (COVID-19) pandemic, life as a small business owner has only been made more difficult. While there have been some innovative approaches to optimizing revenue throughout all of the closures, as the year begins to come to a close it’s important to think of ways to get the most out of your efforts. To better minimize your tax liability here are a few tax planning strategies for small business owners to use when preparing for 2021.
Understanding Tax Planning and its Importance
Tax planning is a process that helps you reduce the amount of taxes you need to pay at the end of the year. While some people wait until the last minute to do this, the earlier you start, the better your chances are of increasing your tax refund. There are plenty of different ways to approach tax planning, but it tends to revolve around three main methods: reducing your income, increasing deductions, and utilizing tax credits.
Even if you plan to rely on a certified public accountant (CPA), tax planning is important. It saves you money and helps you avoid overpaying on your taxes. It will also give you an overview of what you’re spending each year and how you can take advantage of planning for your future or furthering your education.
Effective Tax Planning Strategies for Small Business Owners
The best time to start preparing for 2021 is now. By being prepared, you’ll give yourself time to get the most out of your taxes and reduce your expenses. Here are some good tax planning strategies to familiarize yourself with.
Consider Your Tax Structure
At the inception of every business, you need to determine the type of tax structure that you were going to operate under. Some small businesses register as a sole proprietor, others choose to create an LLC. However, your business evolves as you begin to understand your audience base and economic circumstances. This year consider whether or not your tax structure still accurately reflects your small business. Different tax structures have different parameters for filing their taxes, so it’s important to figure out which one will be the most beneficial for you and your business. You’re not required to stick with your original tax structure. Do some research on sole proprietorship, partnership businesses, LLCs, S corporations, and C corporations to figure out which one best describes the work you do.
If you’re a sole proprietorship, partnership, LLC, or S corporation, you’ll undergo significant tax savings if you change your status to a C corporation. If this change seems applicable to your small business, talk to a professional CPA about whether or not you’ll benefit from filling out and filing Form 8832.
Make a Plan for Paying Your Taxes
Now is the time to start making a plan for how you’re going to pay your taxes. To avoid closure, fines, or headaches in 2021, make sure that you know exactly how much you owe and how you’re going to pay. One way to ensure that you’re in good standing is to utilize the “pay as you go” tax system, which involves making quarterly payments based on prior years profits. If you overpay, you will end up getting a tax refund. If you underpay, you’ll be responsible to make up the difference come April. However, this system isn’t always enforced as the year progresses and many small businesses do not actually pay as they go.
Since there’s no automatic deduction for managing your own taxes on an ongoing basis, it can create a lot of stress when you wait. Not paying quarterly payments means that you’ll have the burden of one lump sum and any penalties or interest that are incurred due to late payments. Make sure that you’re setting aside some money to pay your taxes. It can feel like an uphill battle but following the rules and regulations of the IRS is absolutely essential if you want to continue to operate.
Choose the Right Accounting Method
The way that you calculate your income and revenue makes a difference when it comes to taxes. It all depends on whether you report profits when the money is received or when an order is placed. Make sure that you review how you approach your accounting and determine whether or not you’ll benefit from making a few changes. If you’re not sure what the best option is for you, talk to a professional CPA and review your tax strategy together.
Contribute to Your 401(k) or SEP
Maximizing your deductions is essential. One way that you can reduce your taxable income is to contribute to one or more retirement accounts. Consider submitting the maximum amount to both your 401(k) and your simplified employee pension (SEP).
Clarify Pass-Through Businesses
A pass-through business is considered a business that doesn’t pay taxes itself, but instead passes its income (and tax liability) to the owners. If your small business is considered a pass-through business, you may be eligible for a tax break up to 20%. Depending on your profits and expenses, this can lead to drastic savings. Through the qualified business income (QBI) deduction, those eligible are able to receive a maximum of a 20% tax break on the income generated from your small business.
While this seems like a no brainer, determining your eligibility can be difficult. When small businesses attempt to do this on their own, they usually end up unsuccessful and just pay the difference. With the high restrictions associated with pass-through businesses, it’s a good idea to work with a professional CPA. If you end up being eligible, the tax break alone is well worth the investment.
Research PPP Loan Forgiveness
Due to the novel coronavirus (COVID-19), many small businesses were eligible to acquire PPP loans. While the money received could be excluded from a small business’ gross income, the subsequent expenses incurred do not qualify as a deductible. Make sure that you fully understand what this means for your business and how it will affect your taxes in 2021. In the meantime, keep an eye out for any congressional updates that clarify stipulations about PPP loans.
Small businesses tend to overpay in their taxes every year, regardless of how much money they bring in. To make sure that you’re offsetting your profits and keeping more of your hard-earned money in your pocket, tax planning is essential. However, not all tax planning is created equally. By working with a certified tax coach, you’ll have access to tax professionals with advanced training in tax planning. Certified tax coaches go above and beyond to help maximize deductions, credits, and strategies to help their clients pay less in taxes year after year. Del Real Tax is one of the select companies fortunate enough to have an experienced certified tax coach available to our clientele.
Del Real Tax Group specializes in helping small businesses maximize profits and each of our accountants work to give you personalized service and attention. Since we’re committed to working with small business owners only, we’ve developed a very specialized niche that allows us to concentrate on our clientele. Our primary goal is to help you save thousands of dollars in taxes a year! See how we can help by calling us at 708-788-0082 today.
Looking for a CPA to perform your bookkeeping or an accountant for your small business? Del Real Tax has been working with small businesses and individuals located around Chicago for many years performing many accounting tasks that can be hard for small business owners and individuals to understand. View more.
Choosing the right company structure is crucial in planning for the successful operation of any business. These decisions can affect a broad range of issues, from equity arrangements and tax advantages to long-term financing and succession of ownership. Del Real Tax Group can help. View more.