Like many Certified Public Accountants, Daniel Nickischer, a partner in RKL’s Reading office, has some basic advice for his clients. Keeping track of your taxes is a year-round job, not just around the filing deadline.
The gentle reminder is to help keep things flowing and prevent any last-minute additions that could delay the process.
“My first advice is it shouldn’t be something that we focus on at the end of the year,” Nickischer said in a phone interview. “It’s a year-round conversation with the client and the CPA. I see a lot of clients come to December and start doing reconciliation. You should be doing it on a monthly basis and have a scoreboard on how you’re doing. That way you won’t be in a shock. You need one to manage your business.”
With that in mind, Nickischer says there are some things for small business owners to watch out for when preparing their 2021 taxes:
- For Paycheck Protection Program loans, any loan forgiven in 2021 is not taxable income. “If a $50,000 loan is forgiven, there should not be liability. PPP forgiveness is not taxable,” Nickischer says.
- “Also along the lines of the coronavirus pandemic, that a lot of owners are not aware of, is the Employee Retention Tax Credit Payroll tax credit,” Nickischer says. “If you had idle workers during the pandemic, you should immediately get in touch with a CPA or payroll provider.” The purpose of the ERTC is to encourage employers to keep employees on the payroll, even if they are not working during the covered period due to the effects of the coronavirus outbreak. You qualify as an employer if you were ordered to fully or partially shut down or if your gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021). It’s up to $5,000 per employee in 2020 and increased up to $14,000 in 2021. Companies can get a maximum of $21,000 for keeping workers employed through Sept. 30, 2021.
- One thing to review annually is what the company’s tax structure is like. Is it a small business, single member LLC? It will depend on how fast the business is growing, Nickischer says. “If you’re growing, you might have outgrown you tax structure,” he said. “It might make sense to change your entity.”
- Create a retirement plan that includes profit sharing and/or a 401(k). An employee does not pay income taxes when contributing money. Instead, the employer withholds the contribution from your paycheck before the money can be subjected to income tax. “I’d rather pay for the future as opposed to paying the IRS.” Nickischer says. “It’s something as a tax strategy to reduce taxable income.”
- Another tax strategy is fixed assets. If a company is planning on purchasing equipment in the new year, it may want to move it up to before Jan. 1. “It’s a dollar-to-dollar deduction,” Nickischer says. “It you spend $10,000 on equipment, it is a $10,000 deduction.” Don’t simply “buy it just to buy it, though.” It’s a 100% bonus depreciation through 2022, that will start to decrease in 2023 before being phased out completely in 2026.
- The Tax Cuts and Jobs Act of 2017 changed the rules for net operating losses. If you had losses in 2018, ’19 and ’20, you can carry back to losses for five years. It was previously two years. “You can recoup some of that income,” Nickischer says.
- Tax rates are going up 2022, so another strategy is to accelerate income in 2021 if it is going up in ’22. “A lot of small businesses are accelerating expenses they can pay,” Nickischer says. “On the flip side, an accrual business recognizes revenues and expenses as it occurs.” The IRS states that qualifying small business taxpayers can choose either method, but they must stick with the chosen method. The chosen method must also accurately reflect business operations. “Could they be a good fit to be on the cash basis,” Nickishcer said. “Is accelerating income at end of year to future benefit?”
