Tax season can be a critical time for business owners and entrepreneurs when it comes to saving and setting their companies up for success in the future, so ambitious professionals with hopes of growing their businesses can put themselves in a better position for tax season by staying up to date with changes to tax laws and being proactive in adjusting their finances and business practices accordingly. Depending on whether you’re operating an LLC, a private company, a corporation or a small business, the tax deductions and responsibilities your company has will differ
From new tax deductions to helpful tax credits, here’s how some important changes to taxes might impact your business in 2020 along with some suggestions that will help you maintain your cash flow and get as much money back for your ventures as possible.
What Deductions Should You Claim?
The IRS is recommending that business owners recalculate their tax payments to get a better idea about exemptions, deductions and tax credits they are eligible for. There are a lot of factors that come into play for entrepreneurs and business owners when it comes to reporting income and paying taxes accurately, such as corporate tax filing information, employee benefits and more.
Many business owners are turning to professional accountants and CPAs who have experience using tax preparation software that can help business owners and entrepreneurs with large amounts of reporting data save time and money when it comes to tax season. There are a variety of ways that savvy business owners can plan for taxes and when they’re strapped for time, or in unfamiliar tax territory, it helps to know that there are resources such as professional tax pros and detailed guidelines published online to help them get the information they need.
Some businesses may be entitled to a qualified income deduction which will let them subtract up to 20 percent of their relevant business income with an additional 20 percent of real estate investment dividends. If the money your business made went to a C corporation, then you won’t receive this deduction.
Taxpayers may also be subject to excess loss limitations and should recalculate their amount of excess business loss which is the number of deductions that are associated with your businesses and trades which exceed your gross income and gains from those assets. This is why keeping close track of business invoices is crucial for any owner hoping to save money on taxes because they’ll know exactly where funds came from.
Meal and Entertainment Expenses
If your company provides employee perks in the form of fun and food, then you should probably take a look at what deductions you’re still eligible for and how you can go about claiming them. A new change that may be worth noting for companies that engage in regular company outings is that new tax laws do not recognize expenses related to recreation and entertainment as eligible for deductions, Another important note is that business owners can still get 50 percent of what they pay for meals back if the business owner is around when the food is served and the food and drinks aren’t “lavish or extravagant.”
Deductions for Small Businesses
Small business owners can take advantage of tax deductions from basic business expenses, ultimately reducing the amount of income tax you owe each year. For example, if your home office is the primary location of your business, you’re likely to be eligible for deductions. Some other small business expenses that can qualify for tax deductions are office supplies, computer software and travel expenses.
LLC vs. Sole Proprietor Status
As a small business owner, you have to decide how you want to structure your business. Claiming yourself as a sole proprietor on your business means that you are not considered a legal entity. It is the most simple way to structure your business when filing taxes, however, you are obligated to pay employment taxes on every dollar you make.
Let’s say your business has grown over the past year. By structuring your business as an LLC, you are creating a separate business entity from yourself, protecting yourself and your personal assets. You will be required to pay income tax on your business profits as well as Medicare and Social Security taxes. However, as an LLC owner, you have the option to claim an S corporation status, meaning you are declaring yourself as an employee of your business as well as the owner. If you decide to declare S corporation status, you only have to pay employment taxes on the salary you claim is appropriate for yourself.
Another important thing to know is how losses can impact your tax filing status. Losses are not uncommon, and it is okay to claim them on your business’ tax files, as long as they do not become a yearly occurrence. You have to be able to demonstrate profits in order to claim business expenses on your tax returns, otherwise, you may find yourself in a net operating loss, or NOL. Basically, a NOL means that the business deductions you claim are higher than your business’ income.
According to Justin McCormick, the VP of Operations & Finance at WealthFit, “without taxable income, you won’t be able to deduct a business loss for a refund. It is also true that you might experience a loss even with multiple income streams. If your loss is greater than your income from other sources, you can take a deduction. However, your deduction is limited to the amount of your income.
There is never a bad time to examine the money you pay out for taxes and the potential for deductions and money back at the end of the year. In order to maintain sufficient funding for future projects, seize new growth opportunities and provide the type of benefits you want to as an employer, scrutinizing how you pay taxes and staying up to date with the changes to tax laws in an important responsibility.
Being aware of how tax laws are changing is an important part of keeping track of your company’s finances and will allow you to balance your budget and to plan your business strategy more effectively. Changes to possible deductions, filings dates and tax rates might make a big impact on the money your company saves every year, so it helps for business owners to keep track of changes to that they can plan accordingly.
Despite the arduous undertaking that taxes can become, taking small steps over the course of the year to check in on how you’ll report finances and where you can claim benefits will help your business succeed long term.