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Tax Questions for Small Business Owners

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By Debbie Gregory.

LinkedIN Debbie Gregory VAMBOA VAMBOA Facebook VAMBOA Twitter

The year 2020 has been a very shaky on numerous levels.   Many small businesses have been negatively impacted by the COVID-19 pandemic. There are some that have continued to operate profitably and even experience growth with the help of government loans, tax credits, and payroll deferrals.

All have seen drastic changes to their income, workforce, supply chains, and customers. As we head into the holiday season and New Year it is time to focus on what your potential tax liabilities for 2020 will be. What are the questions you should discuss with your accountant or tax professional to plan appropriately and not be surprised?

Below are five tax related issues that immediately come to mind that you will want to discuss:

1.) Will the government stimulus check impact my taxes?

The answer is both yes and no.  It depends on the programs and assistance you may have taken or not taken.  Below are three of the most popular COVID assistance programs and if they will help or harm your taxes for 2020:

  • If you participated in the Paycheck Protection Program (PPP) you will not be taxed on any loans you took under that program. However, any expenses incurred that are eligible for forgiveness are not tax deductible that may create a tax liability for you.
  • If you paid any employees for time off under the Families First Coronavirus Relief Act, you will be entitled to a tax credit once this year ends.
  • If you deferred payroll taxes, you will still owe them; you simply delayed when you needed to pay them.

2.) How does working from home impact taxes?

You and your employees who are working from home may be able to deduct expenses incurred from running an office out of your homes.  Some of the expenses may include such items as the space you used, equipment, utilities, etc. However, if your employees are working from home out-of-state you may be liable for higher payroll taxes than your home state charges. It really depends on the makeup of your company and employees if you may be facing any potential tax liabilities or benefits.

3.) Should I be saving more for my retirement?

Most of the current workforce working from home has seen a dramatic decrease in the amount of money they spend on food, going out to restaurants, entertainment and other consumer goods that may translate into building greater savings.   Now is a very good time to put those savings away for the future. Consider contributing more to your 401(k) or IRA accounts.

4.) Is now a good time to invest in capital equipment?

Right now, there are a lot of outstanding deals out there and interest rates are very low too. Lots of businesses are taking advantage of that fact and are buying needed equipment, furniture, technology, and other capital items at steep discounts. A lot of these purchases are deductible and can equal huge tax savings.

5.) Can I estimate my 2020 taxes based on last year?

Candidly, 2020 has been so chaotic and unprecedented that your estimation based on the prior year should be tossed out the window! You may have made way less this year than anticipated, or way more, and your actual tax implication may not even properly reflect the reality of your income. Take a close look at how your business did this year overall to make a better estimation of what your taxes may be.

Taxes are an unavoidable and annual huge expense for all of us. This year taxes are going to be more confusing and difficult than ever before. The earlier you can get together with your accountant or tax professional to go over what your potential tax liability will be, the better it will be, and you can prepare accordingly.   These are questions that you need to address with your account or tax professional.

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By Debbie Gregory.

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Every small business wants to minimize their taxes and maximize their deductions. However, many small business owners miss out on a tax code that can benefit them, U.S. Tax Code Section 179.

 

According to a recent survey conducted by the National Federation of Independent Business (NFIB), Section 179 has helped small business growth and prosper:

  • 35% of current small business owners are unaware that they could be eligible for a deduction under Section 179.
  • 78% of small businesses used Section 179 to offset their tax expenses last year.
  • 82% of small businesses purchased equipment or software last year (cars, trucks, office furniture, machinery, etc.).
  • The top three purchases made were computers (51%), vehicles (44%) and office furniture (31%).
  • 75% made qualifying purchases of less than $50,000.

 

What is Section 179?

Section 179 refers to property depreciation deductions a business can claim. It does not increase your overall deduction but it can give you the option to take the deduction more quickly. In other words, you can declare the entire deduction in a single year instead of spreading it over many years.

 

An asset’s useful life depreciation deduction can be stretched out to a maximum of 39 years but most are taken over a 5 year period. Under Section 179, you can deduct the entire expense in the first year.

 

This can be especially helpful if the company needs the asset to grow and the item purchased was quite expensive up front. The tax impact can help ease the burden and help the company grow. Currently, the deduction is limited to $1 million and a total investment limit of $2.5 million.

 

How Can This Help Your Business?

Section 179 can be used for most tangible assets purchased to run your business. This tax break is intended to make it more affordable for small businesses to buy expensive equipment including:

  • Machinery
  • Computers
  • Computer software
  • Other business equipment
  • Company vehicles
  • Office furniture
  • Capital investments
  • Property
  • And more

While a business has always been able to deduct expenses of this nature, they could only deduct a portion of the asset’s value every year. With Section 179 the full value can be deducted in the same year that the purchase was made.

 

Where Can I Obtain More Information About Section 179?

If you have any questions about Section 179, visit the official Section 179 informational website at http://www.section179.org/. If you are looking to learn about other potential tax breaks for you or your business, you can always visit the IRS’ website at https://www.irs.gov/ to learn more.

 

Our Advice

The US tax rules are constantly changing, it is always best to pay attention to taxes all year long and not only at tax time.  Keep alert for changes in tax laws and always consult a professional for help.

 

Disclaimer

We are not tax professionals and we strongly recommend that before you take any actions, that you consult your own licensed tax professional. It is always best to seek professional assistance if you have questions about taxes or their s on your specific business. Working with a professional also provides you better opportunities to find and take advantage of legitimate tax breaks and opportunities to lower the amount of taxes that you pay.

 

By Debbie Gregory.

LinkedIN Debbie Gregory VAMBOA VAMBOA Facebook VAMBOA Twitter

 

 

In the first part of this article, we discussed smart tax deductions, carryover deductions, changing your business structure, keeping a close eye on your Adjusted Gross Income (AGI), as well as tax-free ways to get money out of your business.

 

This second part will covert five more ways to lower your business taxes including abandoning rather than selling property, accountable plans for your employees, fringe benefits, retirement plans, and smart year-end tax planning.

 

More Ways to Lower Your Taxes:

 

6.) Abandon Property Instead of Selling It:

If you own a property that has no value to the business, you may wish to consider abandoning it rather than selling it for a nominal amount. Doing so could allow your business to take a loss on the property, that is fully deductible, rather than treating the loss as a capital loss, which is subject to limitations.

 

7.) Use Accountable Plans:

Accountable Plans allow you to reimburse your employees for such items as travel, entertainment, tools, or other costs and then deduct the expenses but not report the reimbursements as income to employees. This can potentially save your company money in employment taxes which will overall lower your business taxable income..

 

8.) Take Advantage of Fringe Benefits:

Paying employees more will increase your costs your business employment tax. However, if the business pays for certain fringe benefits for employees, these taxes can be avoided, which reduces your overall taxable income.

 

These types of tax-exempt benefits include:

  • Educational assistance
  • Transportation benefits
  • Meals provided for employee convenience
  • Health benefits
  • Long-term care insurance
  • Group term life insurance
  • Disability insurance
  • Dependent care assistance

 

9.) Shelter Profits in Retirement Plans:

A 401(k) or a similar tax-deferred retirement plan is easy to setup, you don’t pay taxes on the contributions, and the savings grow on a tax-deferred basis. These types of plans not only allow you to save money on taxes, they help incentivize your employees, and it also shifts most or all of the cost of savings to the employees while giving them choice and flexibility in planning for retirement, instead of a defined benefit pension plan where more of the burdens are on the employer. Employer contributions to an employee retirement plan are also tax deductible and you may qualify for a tax credit for setting up your employee retirement plan in the first place.

 

10.) Smart Year-End Tax Planning:

Planning for your taxes should be a year-round activity for a business. You can achieve dramatic savings by taking certain actions towards the end of the year including:

  • Delaying billing for work done late in the year so that payment will be received in the following year
  • Purchase fixed assets and claim a portion of depreciation immediately
  • Revalue the assets that are already listed on your books for their depreciation value
  • If you have a customer who is not paying, you might be able to write this off as an uncollected debt, also known as a Bad Debt Deduction
  • Make sure to have your taxes filed and submitted on time

 

DISCLAIMER: We have done a lot of research on all of the ways covered in this two part series to bring to your attention that may save taxes for your small business, but we are not professionals.  We strongly recommend that before you take any actions, that you consult your own licensed tax professional. It is always best to seek professional assistance if you have questions about taxes or their implication on your specific business. Working with a professional also provides you better opportunities to find and take advantage of legitimate tax breaks and opportunities to lower the amount of taxes that you pay.

 

Ten States & Their Tax Information for Small Businesses

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By Debbie Gregory.

LinkedIN Debbie Gregory VAMBOA VAMBOA Facebook VAMBOA Twitter

 

All businesses pay taxes, there is not any way of getting around it.   However, depending on where you start and operate your business, you may be able to minimize the amount of taxes that you pay. We aren’t just talking about income or property taxes either. Certain taxes are higher than others and each state has its own tax rate for each item taxed.   Taxes such as property, sales, excise, unemployment insurance, franchise, and income taxes for both the business and your personal income vary depending on where you live and run your small business.

 

What are the best states in the nation to start a business and minimize your overall taxes?

  • Alaska: Alaska has no sales tax and no personal income tax. It does have particularly high excise taxes as well as some of the highest property taxes nationwide.
  • Florida: Florida has no personal income tax, but their sales tax is 6% and is higher and lower than other states. Florida excise tax is also quite high.
  • Ohio: Ohio is one of the six states that does not have corporate taxes.  However, Ohio is the seventh highest personal taxes in the country.  The sales tax rate in Ohio is 5.75%
  • Nevada: Nevada has no corporate income tax and no personal income tax. Property taxes are also fairly low. However, they the sales tax rate in Nevada is on the high side at 6.85%.
  • New Hampshire: There is not an income tax and the sales tax is zero and cities and municipalities do not have a sales tax.  There is an 8.5% tax assessed on income from conducting business within the state of New Hampshire.
  • South Dakota: South Dakota has no corporate income tax and no personal income tax. Their sales tax is quite low at 4.5%. However, the franchise tax rate in South Dakota is high.
  • Tennessee: There is no state income tax but Tennessee has one of the highest sales taxes at 7% and cities and counties can add as much as another 2.75%.  Tennessee’s excise tax, which effectively is an income tax, is a flat 6.5% tax on net earnings from doing business in the state.
  • Texas: Texas does not have a state income tax, but the sales tax rate is 6.25% and localities can also add their own sales tax rate, so it is as high as 8.25%.  Texas does not have corporate taxes.
  • Washington: Washington is one of the states without state income tax.  However, the sales tax rate is 6.5% and depending on local municipalities, the total sales tax can be as high as 10.4%.  There is also a business and occupation tax (B&O).
  • Wyoming: Wyoming has no corporate income tax and no personal income tax. Their sales tax is one of the lowest in the entire nation at 4%. However, their property taxes are quite high.

 

VAMBOA hopes this state tax information is valuable to you and your business.

 

15 Non-Deductible Business Expenses

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By Debbie Gregory.

LinkedIN Debbie Gregory VAMBOA VAMBOA Facebook VAMBOA Twitter

 

 

New changes to the US tax laws have made certain expenses no longer deductible.

 

Here is a quick list of 15 things you cannot write off on your taxes:

1.) Entertainment

Companies used to be able to deduct the costs of entertaining clients or employees, this is no longer the case. Now, you may not deduct any portion of items such as tickets to the theater or sporting events is deductible.

 

2.) Meals

Meals for clients and employees, such as entertainment, used to be deductible on business taxes. Now, only 50% is deductible and even that is only allowable in specific cases. There are still a few exceptions, such as company picnics or break room snacks, where you can deduct the entire cost.

 

3.) Commuting

No matter what form of transportation you use to get back and forth to work or how lengthy or difficult it is to get to your business and home again, you are not permitted to write off the costs of commuting.

 

4.) Work Clothing

In the past, purchases of business appropriate attire were deductible. Now, only clothing not suitable for any possible street use, such as company specific uniforms, hardhats, etc., can be deducted.

 

5.) Gifts

The deduction for giving gifts to business associates, vendors, customers, etc. is now capped at $25.00 per gift/person, even if it makes good business sense, in certain situations, to give a more expensive gift.

 

6.) Medicare Taxes

If your income is high enough, you cannot deduct the 0.9% additional Medicare tax paid on net earnings from self-employment or employee wages and the 3.8% net investment income tax paid on income from any business investments.

 

7.) Club Dues

Participating in a golf or tennis club, social club, or fitness center may be a great way for you to meet and network with possible clients and customers. However, the dues you pay to be a member aren’t deductible.

 

8.) Exploratory Costs

A lot of people spend money researching business opportunities before starting their new company. This money is no longer tax-deductible. Though, once you start the business, those exploratory expenses can be treated as start-up costs and then can be deducted in the first year of business.

 

9.) Property Purchases

Legal fees paid to assist with property purchases cannot be deducted on their own. Instead, these fees are added to the cost basis of the property. A portion of the fees can potentially be recovered through depreciation.

 

10.) Fines and Penalties

Generally, government-imposed fines and penalties are nondeductible, regardless of the amount or reason for the fine.

 

11.) Excess Business Losses

Excess business losses for non-corporate taxpayers are treated as a net operating loss carryover and cannot be deducted.

 

12.) Interest on Tax Underpayments

Sole proprietors and owners of pass-through entities (non-corporate taxpayers) that pay interest on tax underpayments cannot deduct them. The interest is viewed as personal interest even if it relates to business income.

 

13.) Interest Expense Payments

If your annual gross receipts for the three prior years exceeds $25 million dollars, you cannot deduct any of your interest expenses on borrowing.

 

14.) Certain Employee Expenses

Reimbursements for employees’ commuting costs or moving expenses are not deductible.

 

15.) Net Operating Loss Carrybacks

Only farmers can deduct carrybacks. All other business entities are only allowed carryforwards and they can only be used to offset 80% of the taxable income.

 

All these tax law changes can affect your bottom line. Working with a CPA or a good tax or accounting service can help you better adapt to these changes and offset some of their potential impact. Always consult with professionals if you have questions or need guidance with any federal, state, or local law changes and tax issues.

 

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