Whenever anyone asks what’s the best tax advice for a small business owner, to me, the answer is obvious: have a good certified public accountant. Yes, it costs a few extra bucks. But taxes — like everything else in this world — are complicated. That should come as no surprise. Taxes also represent, for many business owners, our biggest expense. So it’s worth the investment to have an expert involved. It’s also important to meet with that CPA at least twice a year — I suggest spring and fall. That’s because you don’t want to make big tax moves on December 31!
So, let’s assume you’ve got a good CPA, and you’re scheduling a meeting soon. What should you discuss to save you the most money in 2021? There are plenty of moves you can make if you plan things early. Here are five things to consider.
1. Maximize the stimulus benefits.
This year there are many one-time but powerful tax incentives available for small businesses thanks to the pandemic-related stimulus bills. You may qualify for the Employee Retention Tax Credit, a refundable credit on payroll taxes for businesses affected by COVID. You could take advantage of the additional payroll tax credit under the Families First Coronavirus Response Act if you’re allowing employees time off for COVID-related issues. If you’re helping employees with their health insurance under COBRA, there’s a tax credit for that. If your business suffered losses in 2020 (or 2019 or 2018), you have the ability to carry those losses back to claim taxes paid in the past. These are all huge benefits that could not only save you money but generate cash refunds from the government.
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2. Utilize the Work Opportunity Tax Credit when hiring.
This year, as the economy recovers, you’re going to want to be bringing staff back to the job. You won’t be alone. You’ll be competing against many other companies doing the same. The Work Opportunity Tax Credit may help. This credit, which you take against your income taxes, can be worth anywhere from $1,200 to $9,600 per employee that you hire who was just released from prison, off of welfare, out of the military or — big item — has been unemployed for more than six months. If you calculate this credit for each potential hire, you may want to consider sharing the cash with the employee as a signing bonus to help woo him or her away from a competing employer.
3. Invest in capital assets.
All the new rules of accelerated depreciation from the last tax reform act from 2017 still apply this year. This means small businesses can deduct up to $1,050,000 for capital items purchased and placed into service this year. That includes equipment, forklifts, some furniture, technology, trucks and many other items considered “capital.” You can finance these items at today’s low interest rates, and as long as they’re operational by year-end, you still get the deduction.
4. Leverage the research and development tax credit.
Many of my clients think the R&D tax credit is just for “research” companies like big pharmaceutical or tech firms. But that’s just not true. The credit is available for businesses of all sizes who are doing any kind of research, like developing new products and services, sending out samples, working on prototypes or creating proofs of concept. The costs that qualify include materials and both internal payroll and overheads, as well as any expenses incurred with external contractors. I have clients that are manufacturers and distributors that utilize this credit as an offset to their expenses for developing new projects and products for customers.
5. Hire your kids.
Yeah, that’s right: put ’em to work. If you do, you can pay them as an employee and deduct the expense (assuming they’re performing genuine services for your company). When they do their tax returns, they’ll take the standard $12,100 deduction against their earnings and — assuming you haven’t paid them more than that — they won’t incur any taxes. It’s a great way for your kids to earn extra money (and for you to spend a little more time with them if that’s what you want). By the way, this doesn’t just apply to your kids. You can do the same for others. One other thing: don’t actually give them the cash. Instead, put it into a good savings account. Because who knows what nonsense they’ll spend it on if you actually let them have it, right?
Going back to my original advice, you need to talk these matters over with your accountant, and you want to do this sooner rather than later. Trust me, you’re not going to want to fool around with the calculations for some of the tax credits I mentioned above because they’re complicated. Why? Because it’s the government, that’s why. So be proactive and use these benefits to grow your business and hire your employees. This is not just about expenses, it’s about investing.