Tax season is upon us. If you are filing a tax return for your business, there are some things you may want to consider.
The first of which is to think about hiring a professional. With so many tax credits in the wake of the pandemic and near-constant updates to various aspects of income tax filing each year, a bookkeeper or accountant is essential. A bookkeeper can help keep all necessary paperwork and records in order. An accountant will know how to apply for all available tax credits best suited for your business.
Whether you opt to file your own tax returns or hire someone to help you, it is a good idea to keep separate books and records for your business and personal expenses. Perhaps consider storing each in separate files or drawers in your filing cabinet or desk. That way there are no surprises when you review expenditures months or even a year later as part of the tax filing process.
The IRS has postponed tax filing and payment due dates for individual taxpayers (e.g. Form 1040) until May 17, 2021. Not affected by the automatic extension are businesses, employment tax filings, trusts, or not-for-profits, which will follow their original tax filing due dates. Taxpayers can file Form 4868 to receive an automatic six-month extension to submit a tax return.
Rather than procrastinating, I suggest filing tax returns promptly to take advantage of loss carryback. Given the pandemic and its financial impacts, this could help businesses recoup taxes overpaid previously. Under a provision of the CARES Act, businesses that generated a net tax loss during 2018, 2019, or 2020 are eligible to carry the loss back to offset taxable income during the previous five tax years. This would result in a refund of taxes paid from earlier years.
For 2020 taxes, the Employee Retention Tax Credit and the Work Opportunity Credit can help qualified businesses lessen the amount of taxes owed. The Employee Retention Tax Credit encourages businesses to keep employees on their payroll. The refundable credit is 50 percent up to $10,000 in wages paid by an eligible employer whose business was financially impacted by COVID-19. The Work Opportunity Tax Credit has been extended through Dec. 31, 2025. The federal tax credit provides incentives for workplace diversity. More information about both of these credits can be found here.
In terms of personal taxes, a new $300 charitable contribution deduction is available whether or not deductions are itemized.
For taxpayers who do not itemize, a $2,000 credit is available for a child born in 2020. The childcare credit is still available as well.
Credit for college tuition and a deduction for student loan interest paid for eligible dependents are both available for 2020.
Homeowners can deduct mortgage interest (within limits) and the real estate tax deduction is capped at $10,000.
Cash contributions are now deductible up to 100 percent of the adjusted gross income. In addition, the CARES Act permits early withdrawal from 401K and IRA accounts without the typical 10 percent penalty charged to people under age 59 and ½.
Sources for this article include Gene Marks, CPA, and Kiplinger Personal Finance Magazine, March 2021. The content of this article is for general informational purposes only and should not be used as a substitute for accounting, tax, or legal advice from qualified professionals in those fields.
For more guidance related to business taxes, consult with a SCORE Bucks County mentor. Learn more and get started here: https://buckscounty.score.org/.