- Though the Georgia Senate runoff races will determine whether another tax overhaul is coming, entrepreneurs can act now to lower their 2020 taxes.
- Strategies available to them include a special 20% tax break for pass-through entities, known as the qualified business income deduction.
- Entrepreneurs can also start a retirement plan, which allows them to scoop up tax benefits in the present while saving for the future.
Whether 2021 will bring higher taxes for small-business owners may depend on the outcomes of the two Georgia Senate races that will be decided in January.
Indeed, two contests in the Peach State are heading to runoff at the start of 2021. Those races are between GOP Sen. Kelly Loeffler and Democratic candidate Raphael Warnock, and Sen. David Perdue, R-Ga., and Democrat Jon Ossoff.
Those elections will determine whether Democrats get a 50-50 split in the Senate — and whether the more aggressive provisions in President-elect Joe Biden's tax plan unfold.
One thing, however, remains true for all owners of businesses: It's better to pay Uncle Sam less than more.
Here are five steps that entrepreneurs can take to reduce the taxes they'll owe for this year.
1. Qualified business income deduction
The Tax Cuts and Jobs Act created a qualified business income deduction for owners of pass-through businesses, which include S-corporations and partnerships.
Business owners with less than $163,300 in taxable income for 2020 ($326,600 if married and filing jointly) may be eligible to deduct up to 20% of their qualified business income.
Above that threshold, complicated rules apply. Work with a tax professional to determine whether this strategy makes sense for you.
For instance, filers in a "specified service trade or business," including lawyers, accountants and doctors, can't claim the deduction at all if their 2020 taxable income exceeds $213,300 for single filers ($426,600 for married-filing-jointly).
2. Bonus depreciation rules
The CARES Act fixed a glitch in the Tax Cuts and Jobs Act that prevented businesses from taking a 100% depreciation deduction for certain property used in commercial spaces, including light fixtures and flooring.
Prior to the fix, business owners would have had to spread the cost of those items over many years. Now they can deduct the full cost up front.
"The benefit is most widely used by retailers, but it's available to any business with commercial or office space whether it's leased or owned," said Dustin Stamper, managing director of Grant Thornton's National Tax Office.
Even better, the new rules allow businesses to take the 100% depreciation deduction on investments made in any of the last three years and to recognize them in whichever years are most favorable for them.
"It may be faster to get refunds by amending 2018 or 2019 returns, but you can use the deduction in whichever year is most helpful," said Stamper.
3. Set up a retirement plan
It's getting a little late in the year, but businesses can still set up a retirement plan and deduct contributions made to it.
The plan can be a defined benefit or defined contribution plan.
You must set up the plan before year-end and the contributions have to be made by the due date of the employer's tax return, plus extensions.
"It allows business owners to take money from the company, put it in a pension plan for the principal owners and get the deduction," said Robert Spielman, a tax partner with CPA firm Marcum LLC. "It's a big deal for owners of pass-through corporations."
4. Employee retention credits
If your business has been adversely affected by the pandemic and you didn't obtain a forgivable loan through the Paycheck Protection Program, you could be eligible to claim an employee retention credit.
Any business whose gross receipts have fallen by more than 50% in a quarter this year compared to the same quarter in 2019 may be eligible. The credit is equal to 50% of up to $10,000 in qualified wages paid per employee.
In other words, the credit could be worth up to $5,000 per employee that you've kept on the payroll. There are limitations for businesses with more than 100 workers.
5. Revisit your accounting method, depending on your business
The Tax Cuts and Jobs Act made the cash accounting method available to most businesses with annual gross receipts of less than $25 million.
The cash method allows businesses to recognize income and expenses as they are received or paid rather than when they are earned and incurred per the accrual method.
Switching to a cash basis may lower your taxable income or increase an operating loss — and a potential refund. That's because businesses using this accounting method can defer income or accelerate expenses.
Cash-basis accounting tends to be simpler for business owners to follow and have lower compliance and bookkeeping costs, compared to the accrual method.
Typically, you also have to file Form 3115 with the IRS to report a change in accounting method.
"This is an unusual year because many businesses are not doing longer-term tax planning," said Spielman. "They're trying to generate cash and worrying about future years later."