Tax season is upon us, even if April is still a few months away. We understand it’s easy to postpone doing your taxes because you prioritize other responsibilities, but you’re only working against yourself and your business if you wait until the last minute. You see, tax planning takes time; it depends on the structure of your business, and how organized you were during the year. Plus, tax laws are continually changing, and the process can get more complicated if you’re not working with a trusted certified public accountant (CPA). Now that we’re a few weeks into the new year, it’s the perfect time to start preparing for your taxes.
3 Changes to Keep in Mind This Year
Tax reform changes established by the Tax Cuts and Jobs Act in 2018 will still be implemented in 2020. We don’t presume to list all the changes here, but we want to bring your attention to these three: a deduction for pass-throughs and corporations, first-year bonus depreciation, and net operating loss changes.
- Deductions for pass-throughs and corporations: There’s a 20 percent deduction for all pass-through businesses, which account for about 95 percent of U.S. businesses; it provides business owners with upfront cash; however, it only applies to companies with an annual income of $315,000 or less. The tax rate for corporations also decreased from 35 percent to 21 percent. The reduced rate is an initiative to encourage large corporations to settle down in the U.S. and create and stimulate economic activity.
- First-year bonus depreciation: If eligible, business owners can now deduct 100 percent of their equipment and property purchases instead of gradually writing off a portion of said assets each year.
- Net operating loss changes (NOLs): Because the tax year may not align with a business’s cycle, NOLs help ensure a business owner isn’t being “taxed on non-existing income.” Furthermore, NOLs can be extended indefinitely, but business owners can’t restructure taxes from previous years, and they only apply to 80% of their taxable income.
Lawmakers expect to spur economic growth by providing financial room for business owners and encouraging them to reinvest in their businesses by buying new equipment or updating technology and investing in their staff or expansion projects. In turn, this should stimulate economic growth throughout the country.
Business Owners Face Different Types of Taxes
As we said earlier, taxes depend on your business’s structure. We’ve listed the five primary types of taxes below.
- Income tax: all business owners file an annual income tax returns, except partnerships, which submit an information return.
- Self-employment tax: business owners file a Schedule SE (form1040) to figure out “the tax due on net earnings from self-employment,” and it goes toward your Social Security and Medicare obligations.
- Employment taxes: these include taxes and forms related to your employees’ payroll, Medicare, Social Security, federal income tax withholdings, and federal unemployment taxes.
- Excise tax: several taxes fall into this category, but they usually regard businesses that work with tobacco, alcohol, or fuel; excise taxes are included in the price of the purchase of such specific products.
- Estimated taxes: if you don’t have taxes withheld from each paycheck or the amount withheld isn’t enough, you will have to make quarterly estimated tax payments. Report all your estimated tax payments on a Schedule 3 form.
Staying up to date with current tax laws, knowing which forms to fill out, and what taxes to pay can be overwhelming. That’s why we recommend working with a financial advisor you trust. You’ll not only avoid missing deadlines, but you’ll have better guidance in any deduction(s) your business qualifies for, and you’ll ensure you meet IRS requirements.
Deadlines, Tax Tips & Resources
Owning a business requires your full attention, and important dates may slip your mind. Here are some common deadlines to be aware of this tax season:
- January 31, 2020: deadline to distribute W2 and 1099-MISC forms.
- March 15, 2020: Tax deadline for S-Corporations and partnerships.
- April 15, 2020: Tax day (sole proprietorship, single-member LLCs and C-corporations.
- October 15, 2020: deadlines for extension returns.
Here at Evolution Capital Group, we’re committed to providing you with accurate and useful information that will contribute to the growth of your business. We’d like to share the following tax tips for you to have readily available. It helps to have a checklist of the important information you’ll need.
- Have the relevant forms you’ll be filing ready by talking to your accountant and determining which forms the IRS will need.
- Talk to your CPA about deduction opportunities to see which ones best fit your company’s needs.
- Don’t overpay or underpay your taxes. Make sure you balance funds such as estimated income tax payments or payroll deposits against your total income tax liability. You’ll avoid simple errors that can cost you the money you could reinvest in your business.
- Don’t rule out an extension. If you started late, or simply need more time to get everything you need to file your taxes, an extension will keep you from missing any deadlines. You’ll still have to pay taxes on time.
- As you can see, tax planning can be complicated. Thinking about taxes throughout the year will help you be aware of any tax law changes, stay up to date on your finances, and be organized with your paperwork.
- Work closely with your CPA. You’ll have better guidance on which forms to fill out, what deadlines to meet, and even decide which state best fits your business’s needs. Furthermore, working with a trusted financial advisor will smoothen the tax return process, guarantee your peace of mind, and give you more time to focus on your business.
In addition to the links you’ll find throughout the article, we’ve included essential resources you can use to read more on tax laws and how they apply to your business:
- The IRS website has information on tax reforms, self-employment, the Affordable Care Act and how it affects you as a business owner, information on healthcare coverage for your employees, as well as access to any forms you’ll need. Don’t forget to verify them with your CPA.
- The S. Small Business Administration guide on tax codes and responsibilities as a business owner.
- If you’re deciding which state will best fit your business, the tax foundation website will be an excellent resource for you.
- If you’re a new business owner, the US. Small Business Administration has a guide that will help you decide on what structure best fits your needs.
- While we recommend you work closely with an accountant you trust, if you choose to file your taxes on your own, we suggest you research the best online tax and accounting software available to you. You can start
Contact your CPA or trusted financial advisor to discuss your tax return planning for 2020. And sign up for our newsletter — you’ll get insightful articles that will help you care for and grow your business.
Evolutions Capital Group