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.
Great article.
Which state is best for tax incentives for small business.
Verizon did a good study on the best states to own a small business that takes into consideration more than just taxes.
https://www.verizon.com/business/small-business-essentials/resources/the-top-10-most-small-business-friendly-states-in-the-us/
Having said that, to me the 9 states that charge no income tax are all good places to be, particularly since so many small businesses are pass-throughs and income gets taxes at the personal rather than business level. Investopedia lists them here
https://www.investopedia.com/financial-edge/0210/7-states-with-no-income-tax.aspx
nice article
Thank you! We’re glad you liked it.
Thank you
You’re welcome, Rosa!
Are there age limits or dependency requirements?? Thanks.
Per the IRS To claim your child as your dependent, your child must meet either the qualifying child test or the qualifying relative test: To meet the qualifying child test, your child must be younger than you and either younger than 19 years old or be a “student” younger than 24 years old as of the end of the calendar year.
Thank you Gene Marks for the Tips, they are very helpful.
Question are there many forms that have to be filled out to show that we hired our
children are Grandchildren?
Hi LaTonya, there are no forms at all. Just add them to your payroll. It’s perfectly legal as long as they’re performing legit work. I should mention that you will still have to pay payroll taxes.
Can you direct me to more info on accelerated depreciation?
Sure, check out this link: https://www.irs.gov/newsroom/irs-issues-guidance-on-section-179-expenses-and-section-168g-depreciation-under-tax-cuts-and-jobs-act
How old do my kids have to be before I start paying them and do they have to file as an independent?
Thank you.
They can be any age where reasonable work is done. They do not have to file as an independent unless their income exceeds the standard deduction.
I appreciate your periodic updates on relevant data and information to your clients. Keeping us informed about taxation legislation, economic trends and social issues that may impact small non-profit enterprises or businesses and corporations should be included in all insurance companies mission statements in response to community engagement in initiatives in depressed communities of economic poverty.
We’re glad you like our articles, Gilbert! Thanks for the comment!
Very informative
Thank you, Simon!
As a small business owner we need all the tax savings advise we can get, to present to our accountant, for 2020 and 2021, Thank You
You’re welcome, Robert!
Great info. I have heard about the R&D tax credit but I don’t know how to get it. Where can I find more information on the R&D tax credit and how to apply it to a tax return? Thank you.
Hi Rudolph, the calculation isn’t for the faint of heart! Here’s more details from the IRS. I recommend using an accounting firm that specializes in the R&D tax credit – you can ask your accountants or your state CPA society. https://www.irs.gov/pub/irs-pdf/i6765.pdf
Thanks for these tips. Unfortunately, I am a very Small Business and none of them apply to me. I am the owner and the only employee. While I do research on new items sell in the f=store (gists and incense store), none of they apply. So what could help me to lower my taxes? My accountant cannot find anything. Not even the new laptop that I am using only for the store.
I can’t argue with your accountant. For very small businesses, your tax moves are kind of limited.
Christiane, I don’t understand why your laptop is not tax-deductible. In my non-CPA opinion it certainly should be. I suggest finding another CPA and asking her: Can you deduct 100% business meals for 2020 & 2021 and business trip miles to buy business items like the cost of goods sold, even if you only look and don’t actually buy?
I am looking for another CPO. I did not say enough to question his findings and I am now sure I did not have all the expenses taken into account. Now for 2020 no travels occurs, so that it not difficult. Thanks for the suggestions.
We are a very small business and I know that we were able to deduct a trailer that we bought along with the cost to buy the business. Not sure why your accountant couldn’t deduct the laptop and supplies for your business. I would spend the money to double check with another accountant.
I am in the process of looking into new CPA. Apparently because the laptop was bought in Dec, 2019 and I start working on it immediately, I should have waited until January to make the 2020 expenses.
I’m a sole owner/employee of my consulting business as well, and I was able to deduct my laptop last year. I did my own taxes using Turbo Tax, but there was definitely a spot either under assets or supply category where I was able to list that as a business expense. I’m sorry I can’t remember the exact category it was listed. Depending on the cost is probably wouldn’t be listed under depreciating assets unless it’s over a certain amount, but it definitely counts as a deductible business expense.
Depending on your business type, be sure you pay yourself rather than get taxed on the money you leave in the business come year end. Unfortunately the government tax system is geared to tax any profits that you make, so just be sure you maximize the money rather than get it taxed. Too bad the government does not at least provide the first 10K, or 25K as tax free. That would really help my business more than anything. It would enable me to actually save for downturns in business.
Equipment, internet advertising, computers, etc, are all business expenses.