7 End-of-Year Tax Tips for Your Small Business

Many small businesses are setting aside time before the year wraps to look for last-minute ways to save money on their tax bill, as well as reviewing tax deadlines and considering what effect, if any, the pandemic may have on their business taxes.

“In the final quarter of this most unusual and challenging year, there is still time to take actions that can favorably impact your bottom line and your tax bill for 2020,” advises SCORE, the national network of volunteer mentor experts dedicated to helping small businesses.

Here are 7 key end-of-year tax tips – including deductions, credits and other implications – that could help your small business come tax time.

Consider Implications From Pandemic Relief Measures

Several pandemic-relief measures were put in place in 2020 for small businesses, including a payroll tax deferral and business tax credits.

The degree to which you’re affected – including tax benefits – will depend on the type of small business you have and its participation in programs or assistance received as part of the CARES Act, SECURE Act, Families First Coronavirus Respond Act and the Paycheck Protection Program.

Start or Add to Your Retirement Plan

There’s still time this year to add to your retirement savings or start a plan if you don’t have one yet. 

Tax-advantaged retirement plans for small business owners include SEP-IRA, SIMPLE IRA, and Solo 401(k), with varying annual contribution limits.

Small business owners can generally contribute more money to their retirement plans than employees who don’t own a business, writes Louis DeNicola in a Funding Circle article.

“Depending on their marginal tax rate, they could be saving in the low tens of thousands of dollars with combined federal and state income taxes,” says Mario Hernandez, a partner at Gemmer Asset Management LLC in Walnut Creek, Calif., in the Funding Circle post.

Take The Business Income Deduction

There’s a 20 percent deduction on business income for small business owners who report their operations on Form 1040, such as sole proprietors who use Schedule C (as well as income from partnerships, S corporations and limited liability companies, according to an article by the Intuit QuickBooks Resource Center.

“This is a big windfall for small business owners as $20,000 of $100,000 of business income would go untaxed,” advises the QuickBooks Resource Center.  “This deduction allows small business owners to keep more earnings tax-free and helps curb high tax rates and the 15.3 percent self-employment tax.”

The Resource Center post estimates that small businesses qualifying for the 20 percent tax deduction could see their effective marginal tax rate reduced to 29.6 percent.

Check For Startup Deduction

If you’re one of the entrepreneurs who created a new company to meet demand as a result of the pandemic or otherwise opened or bought a small business in 2020, you may qualify for a tax break – a $5,000 write-off deduction for startup expenses under $50,000.

Any start-up costs that are not allowed to be expensed can be amortized over a 15-year period, beginning in the month you start operations.

Start-up costs include amounts paid either to create a trade or business or to investigate the creation or acquisition of a trade or business, cost of advertisements for the opening of the business; travel and other necessary costs for securing prospective distributors, suppliers or customers.

Deduct for Research and Development

This deduction would be for expenses your business incurred for the purpose of discovering information that is technological in nature and for the development of a new or improved business component, perhaps to adjust to the COVID-19 response.

One example cited would be a bakery that invested in developing machinery that automates the icing process.

Consider Big-ticket Asset Purchases

The Tax Cuts and Jobs Act (TCJA)  that took effect in 2018 extended 100 percent bonus depreciation for many assets through 2022, which means you can write off the entire cost of the asset in the year that it was put into use in the business, according to the National Association of Enrolled Agents (NAEA).

“The TCJA also accelerated the ability to expense the purchase of a new business vehicle, so now may be a good time to consider that option,” says the NAEA in a post by Accounting Today.

Check with Your Accountant or Tax Attorney

Taxes for small businesses can be complex, particularly in a year that has come with unprecedented conditions and tax relief legislation.

It’s important to consider working with a CPA or a tax attorney who specializes in small businesses to get more specific advice as to the deadline priorities and any other steps that could make a difference in your total income and tax liability this year.