Warren Buffett’s famous quote, “You never know who’s swimming naked until the tide goes out,” is eerily ominous this year. More than 100,000 small businesses have permanently closed due to the COVID-19 pandemic. If your business is still in the fight, congratulations! But if you’re feeling a little drafty from lack of adequate “swimwear,” know that you’re not alone.
To continue in survival mode, you’ll need to hold on longer. Below are eight tax and business strategy tips that could help you stay afloat—and perhaps even thrive—as we head into 2021.
Pay your bills on time
Missing or being late on vendor payments and other bills can devastate a company’s financial standings, including credit. IRS penalties can be equally as devastating. Penalties for skipping payroll taxes are some of the most severe – simply failing to file can carry a 15% penalty, and the addition of a trust fund recovery penalty can make the business owner 100% personally responsible for repayment. And if you received a PPP loan this year, take the forgiveness process seriously. You may have heard that loans under a certain threshold will be automatically forgiven, but you must meet critical deadlines for forgiveness.
Sign the checks yourself and pay attention
Even when the economy is thriving, small businesses are four times as likely as large organizations to be victims of check and payment tampering and twice as likely to be victims of billing and payroll fraud. These crimes are often committed by trusted managers and employees and the losses can be destructive (often surpassing $100,000 over time). We’re often brought in to conduct forensic audits to uncover inside fraud for small businesses. By that time, the fraud has usually been occurring for years. One easy way to prevent employee fraud as a business owner is to insist on signing checks yourself and to pay attention to the reports and invoices that pass your desk.
Stay ahead of tax rate changes
Changes are coming. It’s too early to speculate, but if President-elect Joe Biden has his way, taxes will rise for many small business owners. The corporate tax rate could return to 28% and tax cuts for individuals making over $400,000 annually may be rolled back. Some classic tax strategies could mitigate the effect on your business, such as accelerating what income you can to 2020 while deferring deductions until next year. And if you own a closely held business, what happens to the business will certainly affect your estate plan and vice versa. With estate tax rates in flux, a revisit of your estate plan is in order.
Take advantage of bonus depreciation opportunities
Do you own depreciable property such as a company vehicle, machine, or building? Currently taxpayers can take a late election, revoke an election, or withdraw an election for the 2018, 2019, or 2020 tax years for these types of assets. You may elect 100% bonus depreciation, deduct the expenditures under Section 179 (“expensing”), or depreciate them over a 15-year life depending on your situation. The IRS recently released new revenue procedures with detailed rules for applying these changes, so the topic is worth another revisit before year’s end.
Re-evaluate current and past business losses
The CARES Act suspended the limits on business loss deductions for the 2018, 2019 and 2020 tax years. That means you may be able to amend past returns to claim full losses and obtain a refund of some or all of the taxes you paid then. You may also be able to carry those losses back up to five years. Additional tax changes for business owners—like those relating to qualified improvement property expenses—can affect previous years, too. Be sure to review tax returns from 2018 and 2019 to claim any additional deductions you may be owed.
Adapt to the new norm
The volatility in the market, supply chain disruptions, delays and pivots, and the cost of new safety requirements will result in a bookkeeping challenge beyond anything seen before. Take the construction industry, for example. With lumber prices soaring, energy prices fluctuating, the global supply chain as unpredictable as it is, and now with the presumption that environmental roadblocks will return, it’s not business as usual and won’t be for some time. But there is relief for many of these challenges (tax deductions, for one); you just need to know where to start.
Use the correct accounting method
If your business holds long-term contracts, be sure to re-evaluate your accounting method so that you can owe taxes when and only when you have the money. Small business contractors with annual gross receipts averaging $25 million or less may now be able to use the completed contract method of accounting to defer taxes on incomplete long-term contracts expected to finish within the next two years.
Receive help when it makes sense
Federal tax relief and small business loans are still being handed out. Many business owners don’t want the help but going it alone in the next year may not be a workable solution. Most of these relief measures are low interest and worth considering. Some—like the PPP loan—may even be 100% forgiven for those willing to put in the time and effort.
As a business owner, you know how to pivot. You know how to find opportunities. You may have never been tested like this before, but you have the skills to make it work. It’s time to consider tax breaks and other financial prospects that can take you that final leg to the other side of this long, strange year. And if you have questions, we’re just a phone call away.