2021 Tax Season: What Has Changed for Small Businesses
Need to file small business taxes this year? You might not know where to start.
You aren’t the only small business owner who needs some guidance. The SBA reports that there are more than 30 million small businesses in the U.S., many of which feel they don’t know what they’re doing when filing taxes.
Even if your business has been operating for several years, 2021 isn’t an ordinary year. The COVID-19 pandemic has resulted in some unforeseen changes regarding small business taxes. When you file with a plan, you can use these changes to your advantage.
Before COVID-19, the most recent major changes came in 2018 because of the Tax Cuts and Jobs Act. As 2021 rolls around, businesses will have to digest these changes and the new ones made because of COVID-19.
Read on to learn more about what you should know about and how to prepare for the 2021 tax season as a small business owner.
What Are the Types of Small Business Taxes?
Small business taxes will differ based on the structure of the company. The five primary ones to familiarize yourself with are:
- Income: All businesses except partnerships file annual income tax returns.
- Self-employment: You will pay this tax to cover your Medicare and Social Security obligations.
- Employment: If you have employees, you will have taxes related to their Medicare/Social Security, federal unemployment, and federal income taxes.
- Excise: Certain products like alcohol, tobacco, and fuel carry an excise tax.
- Estimated: Some businesses will have to pay quarterly estimated taxes if they don’t have sufficient amounts withheld.
What Changes Are Specific to 2021?
The U.S. government took drastic measures to lessen the coronavirus’s impact on the economy. Here are some new tax programs and changes it created:
- Coronavirus Aid, Relief, and Economic Security Act (CARES) Act: The CARES Act launched the Paycheck Protection Program (PPP). This is an emergency loan that granted billions of dollars to small businesses. Any money you received through the PPP is a forgivable loan. It is not considered taxable income for 2020 as long as you used the money to fund rent, utility payments, and payroll,
- Business interest expense deduction increases: The CARES Act increased the allowable business interest expense deduction from 30% to 50% of adjusted taxable income.
- Economic Injury Disaster Loan (EIDL): The SBA (Small Business Administration) expanded the EIDL program to help businesses recover from economic slowdowns and mandatory shutdowns caused by the virus.
- Employee Retention Tax Credit (ERTC): The ERTC was created to help businesses retain their staff members. Eligible employers can receive a tax credit equal to 50% of qualifying wages, up to $10,000 per employee.
- Families First Coronavirus Response Act (FFCRA): The FFCRA required some small businesses to provide leave for employees who were affected by the virus. If a business made this kind of payment, it is eligible for tax credits of 100% of the leave cost.
Are There Any Previous Tax Changes I Should Remember?
The 2018 tax reform law produced some important changes you should be aware of:
Deductions for Pass-Throughs & Corporations
The Tax Cuts and Jobs Act of 2018 provides a 20% deduction for pass-through businesses (companies structured as partnerships, sole proprietorships, limited liability companies, and S-corps).
Net Operating Loss Changes
Net operating losses (NOLs) arise when a business’s tax deductions are higher than its taxable income.
You can no longer carry NOLs back for two years. Rather, you can apply them for an indefinite amount of time going forward.
This change has encouraged businesses to take risks, spend more money, and contribute to the economy’s re-growth.
First-Year Bonus Depreciation
The 2018 reform changed the first-year bonus depreciation deduction to 100%.
This means that a small business can deduct the full amount of equipment and property purchases instead of writing them off as portions of their expenses. As a result, the company will have more money upfront to hire workers or invest in the company.
Will There Be Deadline Extensions in 2021?
As you probably know, the U.S. government granted deadline extensions for companies filing in 2020. As of right now, it is unclear if there will be similar extensions granted in 2021.
Tips to Remember as You File in 2021
A certified public accountant (CPA) can certainly help you file properly. However, you shouldn’t be completely out of the loop. Here are some tips to keep in mind:
- Think about taxes year-round: Don’t wait until the last minute to start preparing your taxes. This can result in more complications and fewer opportunities to save money.
- Stay on top of law changes: Educate yourself on the latest legal changes regarding tax filing. You can use your knowledge to ensure your CPA is doing the best job possible.
- Never make assumptions: Don’t assume that the government will enact certain policies or pass tax breaks.
- Incorporate in the right state: It may be advantageous to incorporate your company in a different state than you run it in. States like Wyoming, South Carolina, and Colorado are advantageous places to file in.
- Don’t aim for a refund: If you get a refund, it means you overestimated the amount of taxes you paid. This money could have been reinvested back into your company.
What Tax Deductions Can I Make as a Small Business Owner?
Wondering what tax deductions you can make for your small operation? While not all-inclusive, this list gives you a good idea of what deductions you can make:
- Home Office
- Employee Salaries
Some expenses will require some planning. For example, if you use a vehicle for company purposes, you can itemize specific costs or follow the simple deduction of 57.5 cents per mile for 2020.
There’s no denying that 2021 is a confusing time for business owners and tax policies as a result of COVID-19. As a small business owner, you can protect your company by staying on top of the U.S. regulations regarding taxes this year.
Remember that the (SBA) and Internal Revenue Service (IRS) are the most reliable tax resources for small companies. These resources can help you understand your tax obligations.
However, you should always work with a certified public accountant (CPA) to file your taxes. This way, you will ensure that you pay the right amount and comply with the most up-to-date regulations.