From new deductions to tax credits, learn how to get the most out of your business tax return this year.
Given the unique situation we find ourselves in, tax season is going to be a bit different this year.
Chances are you didn’t file your taxes by April 15th, and the extended deadline of July 15th is approaching quickly. If you’re like most small businesses weathering this downturn, you’ve probably got a million other pressing things on your plate.
To help take the sting out of tax season, and make sure you take advantage of all qualified deductions and credits, we’ve created a list of tips that can make this complex process a bit easier for you. We’ve also highlighted all available deductions and tax relief that can help give your cash flow a much-needed boost.
Prepare All Necessary Documents and Forms
Whether you’re doing your tax return yourself or getting help from an accountant, you will need the following financial documents:
- End-of-year balance sheet
- Income statement
- Payroll report
- Bank statements
- Credit statements
- Gross receipts
- Sales records
- Previous year’s return
- Depreciation schedule
In addition, you may need to file some general and specialized forms. The most common ones are:
- Sole proprietorships: Form 1040, 1040-A, or 1040-EZ (Schedule C to report business income and expenses)
- C corporations: Form 1120
- S corporations: Form 1120-S
- Partnerships: Form 1065. You must also provide individual partner information on Schedule K-1.
- Companies with employees: W-2s for employees and 1099-MISC for independent contractors.
You can download most of the tax forms on the IRS website, along with instructions on how to fill them out.
Take Advantage of Deduction Changes
Deductions provide an opportunity to get a bigger tax return, or at least diminish the amount you have to pay. The Tax Cuts Jobs Act of 2017 introduced better conditions for deductions, but additional small business tax changes were made by the CARES act as well. Each change has exceptions, so check whether your business is eligible before filing your taxes.
Here are some of the most important deductions you can take advantage of this tax year:
Sole proprietorships, partnerships, and S corporations can deduct up to 20% of their qualified business income, qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership (PTP) income.
Net Operating Losses
The CARES act changed the amount and timeframe for carry back of net operating losses. These deductions come with a lot of fine print, so read it carefully. In general, you can carry back any net operating loss for five years, as long as the loss was incurred in 2018, 2019, or 2020 (or taxable years beginning in those years).
The 80% deduction limit is also removed, meaning you can carry back the full amount and offset your taxable income with net operating losses from previous years.
Previously, you could only deduct 30% of your net business interest expenses, but starting in the 2019 tax year, you can deduct 50%. This rule doesn’t apply to partnerships.
Write-Offs for Property Improvements
The Tax Cuts Jobs Act of 2017 left retailers, restaurant owners, and owners of non-resident property out of the 100% first-year write-off rule for property improvements. Fortunately, this has been amended by the CARES act, and if you fall into one of those three categories, you can deduct any improvement costs on your taxes. This also applies to improvements placed in service in 2019.
All small businesses can expense more in depreciation for 2019. The maximum deduction is $1 million, and the first-year bonus was increased to 100%.
Explore Tax Credits
In addition to tax deductions, there are two new tax credits you can take advantage of before filing your tax return on July 15th.
Employee Retention Credit
Your small business can get a 50% tax credit on any qualified wages you’ve paid your employees after March 12th, 2020. You can claim up to $10,000 per employee in wages and health plan costs. The tax credit is available immediately, which means you can reduce the amount of employment tax you need to pay.
This tax credit is available for all small businesses that had to fully or partially close their doors due to official lockdown regulations, or those who had a significant decrease in gross receipts. To be eligible for this credit, your gross receipts must have declined by at least 50% in the first quarter of 2020 compared to the same period of last year.
Sick and Family Leave Credit
If you paid your employees while they were sick, or caring for children or family members after April 1st, you can get a tax credit for that amount, which will be applied to your employment taxes. To be eligible for this tax credit, you have to have followed the regulations for sick and family leave pay.
Get the Most Out of the 2019 Tax Season
This tax season is more important than ever. The decisions you make now could have a significant impact for your cash flow in the following months. If you’re unsure whether your small business qualifies for various tax deductions and relief, seek advice from a tax consultant or a certified public accountant.