For some companies, tax preparation may be more complicated this year due to the dynamic nature of business in 2020 and some tax rule changes. The pandemic has impacted everything from what businesses are selling to how they’re delivering goods and services and employing staff.
“Our tax environment has probably never been more dynamic both in terms of the number and the scope of change,” says Bruce McVittie, CPA, President of McVittie Tax Advisors, LLC.
It’s always important to get organized at year end when options still exist to impact your 2020 books. This year it’s even more essential to be prepared when you meet with your tax advisor.
Use this checklist to get started with your important year-end information gathering.
Organize your records.
Step one is to make sure all of your financial material is up to date and assembled in one place. Complete, tidy records provide your tax advisor key numbers to simplify your tax prep process and help you file accurately with the greatest number of deductions possible. Gather all documents that support your expenses, such as credit card and bank statements, receipts, paid invoices and other material. This IRS page outlines many types of records and receipts you should keep for tax time. Consider using file folders, labels, clips, file boxes and other supplies to organize your records and make them easy to access. Since tax records typically include confidential information about employees and your company, store them securely, such as in a locked filing cabinet. And, make sure you have the capability to shred any documents you no longer need to keep.
Make a list of potential purchases.
Purchases made by the end of 2020 may present an opportunity for deductions from what you owe at tax time. Once the end of the year passes, so does this opportunity since eligible deductions must have been purchased between January 1 and December 31, 2020. To help your tax advisor, craft a list of items your business will need to purchase in 2021 and discuss the possibility of making these purchases before the end of 2020. Consider technology, machinery, office supplies, furniture, business vehicles and other company-related items. If you purchased business equipment because of COVID-19 requirements and restrictions, your business may qualify for the Section 179 deduction, up to $1 million. The Special Depreciation Allowance, “Bonus Depreciation,” can be claimed for certain purchases that do not qualify for Section 179 treatment.
Discuss your COVID-19 program involvement with your tax advisor.
The Small Business Administration (SBA) offers loans, grants and credits to help small businesses during the COVID-19 pandemic. The tax implications are still murky, and your tax advisor will stay informed to ensure that you file properly. Review SBA programs such as the ones below as a prompt to share any details with your tax advisor.
Paycheck Protection Program (PPP).
PPP loans may be forgivable, as long as certain conditions are met, such as that the funds were spent on payroll, utilities, rent or mortgage interest. Your tax advisor will be tracking guidelines set by the CARES Act and the IRS for any updates regarding what is and is not deductible.
Economic Injury Disaster Loans (EIDL).
While the SBA’s EIDLs themselves don’t have any special tax implications, an EIDL Advance might. The EIDL Advance is a grant of up to $10,000, which does not need to be repaid. In the past, the IRS has said that any forgiven SBA loan should be included in taxable income.
Employee Retention Credit.
Businesses that did not receive a PPP loan, including tax-exempt organizations, may be eligible for this credit if their operations were fully or partially suspended by governmental orders, or if they experienced a significant decline in gross receipts. Wages (including some health plan costs) up to $10,000 per employee can be counted to determine the amount of the 50% credit.
Deferral of Employer Payroll Taxes.
Employers may delay payment of the employer portion of payroll taxes incurred after March 27. Self-employed individuals may also defer payment of certain self-employment taxes. Fifty percent can be deferred until Dec. 31, 2021, and 50% until Dec. 31, 2022.
Consider all charitable donations.
Many people have responded to the challenges of 2020 by giving to others. Be sure your generosity is reflected in your taxes by assembling receipts for any contributions you made, financial or other. To encourage giving to nonprofits this year, the CARES Act includes a change in the limitation on charitable deductions for C corporations. C corps may deduct qualified cash contributions of up to 25% of their taxable income made during 2020 to qualifying organizations. Contributions in excess of this can be carried over for up to five years. Your tax professional can help you determine what donations qualify.
Review new credits.
Your business may be eligible for a number of tax credits — these lower your tax bill dollar for dollar, unlike tax deductions that reduce the amount of income you pay taxes on. New in 2020, the Families First Coronavirus Response Act (FFCRA) provides businesses with tax credits to cover certain costs of providing employees with paid sick leave and expanded family/medical leave related to COVID-19, from April 1 to Dec. 31, 2020. Review this list from the IRS to see what other credits are available so you can bring them to the attention of your tax provider. Some of the most common taken by small companies include the Small Employer Health Insurance Premium Credit and the Work Opportunity Tax Credit.
Consider retirement plans.
Increasing your contributions to — or establishing — a tax-deferred retirement plan may reduce your taxable income and help you and your team save for the future. There are numerous options to explore. The tax implications are just one aspect of retirement plans, of course. Employee retirement plans can help you attract and retain top talent too.
Know the key dates.
Mark tax-related deadlines in a calendar and set up reminders. W-2s, 1099s and related forms are generally due by Jan. 31, the same deadline for furnishing copies of these forms to employees. Be aware that non-employee compensation is now reported on a 1099-NEC and there are penalties for not filing. Your tax advisor can advise you on when your returns are due.
Preparing for year end is important for tax preparation. It also makes sense to check in regularly with your tax advisor during the year so that you’re making informed decisions all year long. “It is very difficult and often very expensive to change how something will be taxed after the activity has occurred. Proactively planning for it can increase the potential for favorable treatment,” says McVittie. “Tax laws change and new regulations are issued. Opportunities do arise and you don’t want to miss out.”
Staples does not provide tax or legal advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax or legal advice. You should consult your own tax or legal advisor regarding your specific situation.