With the end of the year within mere days, a lot of people's minds are on 2021—the economic stability and market forecast, the change in presidential administration, the future of their own business, and tax season.
As tax advisors and CPAs, our firm is well-versed in small business tax services and have prepared a quick list of tips to help you navigate your own tax preparation. Every type of business structure—whether LLC, sole proprietorship, or corporation—has its own functionality for tax purposes. Your individual structure has both legal and tax implications that are inclusive to how your business is built. Learning how your business operates includes learning about its tax structure.
Lean into the IRS
The IRS will likely always get a bad rap for being a bad guy, or an entity to fear. Quite the opposite is true, as the IRS is designed to help individuals and businesses alike stay in compliance with taxes and everything that accompanies the topic. Its website can act as host to a wide range of content and resources to help empower business owners to feel confident in their tax status and associated liabilities.
Some notable sections include:
- Small Business & Self-Employed Tax Center—features tools and IRS forms with instructions for downloading and completing. Topics like starting a business, record-keeping, filing, and paying taxes are all covered in detail.
- Self-Employed Individuals Tax Center—this page is a great resource for sole proprietors and those in business for themselves.
- Sharing Economy Tax Center—2020 might become known as the year of the "gig economy" with people picking up side jobs in response to changes to employment brought on by the pandemic. This page provides answers to tax questions related to the sharing economy, also known as the access or gig economy. It pertains to the activity of people earning income by providing on-demand work, services, or goods. (Like a digital platform whether an app or website)
- Learning & Educational Products—featuring hands-on and experiential resources to help small businesses and self-employed alike learn the ins and outs of the IRS and tax preparation holistically.
You can even subscribe to IRS tax tips.
Understand How CARES Act & PPP Loans Apply
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Paycheck Protection Program (PPP) to help small businesses cover payroll and other expenses during the pandemic. Assuming certain conditions were met, businesses can apply to have those loans forgiven, but its accompanying tax scenario might take more time to truly understand.
Potentially, the forgiven PPP loans are not taxable; however the IRS stated that otherwise deductible expenses, such as payroll, will not be tax-deductible if funded with PPP funds.
Aside from PPP, the Cares Act allowed some businesses to defer paying shares of Social Security payroll taxes from March 27, 2020 to the end of the year. Half of those deferred funds must be paid in full by December 31, 2021 with the balance due a year later on December 31, 2022. If your business applies to this scenario, starting to plan for this liability now is a good idea.
Also on the topic of the odd year of 2020, if the operating year was especially hard on your small business, you might be eligible for some relief. If certain conditions are met, small businesses can apply a net operating loss generating back to 2018, 2019, or 2020 to income from the previous five years for a potential refund to help right now.
Avoiding Tax Scams
As mentioned, the IRS is not the entity to fear in business, but tax scams are and unfortunately, a topic that comes up way more than it should in modern business!
Tax scams can be complex and widely varied, but they’re easy to avoid if you know how the IRS operates. The IRS will not initiate contact about a tax matter by phone, email, or in person, without first sending you a bill or notice by regular mail delivered by the U.S. Postal Service. There may be special circumstances — such as an overdue tax bill, delinquent return, audit or criminal investigation — that prompt a visit from an IRS representative. But these visits are almost always preceded by a series of notices in the mail.
In addition, the IRS won’t:
- Demand taxes are immediately paid without an opportunity to question or appeal the amount owed
- Threaten arrest or criminal charges for nonpayment of taxes
- Threaten deportation or revocation of a driver’s or business license
Finally, the IRS will never demand payment using a specific method, such as a prepaid debit card, gift card, or wire transfer.
Combating the Scammers
If you receive suspicious communications, contact your tax advisor. In addition, if you receive a suspected phone scam, consider reporting it to the Federal Trade Commission using the FTC Complaint Assistant. You can forward suspected phishing emails to phishing@irs.gov, and report IRS impersonation scams to the Treasury Inspector General for Tax Administration.
Seeking a Professional
If you're like many small businesses, you're seeking ways to minimize your tax liability while keeping everything else in your business straight and running smoothly. This year's tax topic might be the best time to have a conversation with a tax professional—as they're the most well-versed—especially on the tax implications of the CARES Act and the Tax Cuts and Jobs Act.
