A woman sits at a table and looks down thoughtfully at a few scattered papers.
The coming year's tax season will be challenging, so start planning and preparing now. — Getty Images/kate_sept2004

As the year winds down, it’s time to look ahead to closing your books and preparing to pay your taxes in 2021. In a typical year, November and December are the months in which you might schedule big expenses, deplete your inventory and identify any credits or deductions that you may be able to take advantage of, but the pandemic has made this year anything but typical. Here are some steps you should take now to make tax season in 2021 a little less stressful.

[Read more: Coronavirus Small Business Tax Changes: Everything You Need to Know]

Strategize end-of-year spending

One of the most common tactics for reducing your tax burden is to increase spending in the current year. That means buying large capital items, such as vehicles or equipment, before the tax year closes on December 31, 2020. Some experts also recommend deferring income until the next calendar year, meaning you schedule accounts receivable to be due in January 2021 rather than in December.

[Read more: 5 Smart Small Business Tax Strategies That Will Save You Money]

This year, however, may require a different strategy. CO— spoke to Natalie Rasmussen, senior tax manager at GreenGrowth CPAs to get her take on preparing now for your 2020 tax return. Rasmussen explained that this year is unique not only because of the pandemic but also because of provisions in the Tax Cuts and Jobs Act, like bonus depreciation. In addition, this year was an election year, meaning CPAs and tax strategists are anticipating the new administration will make changes to business and individual tax rates.

“What makes tax planning this year especially daunting is that we have a new president coming in. We think—we don’t know, but we think—that overall tax rates will probably go up starting next year,” said Rasmussen. “The old strategy of pushing income and receivables into the next year doesn’t apply now. Because it’s a lower tax year, it makes more sense to claim income under the current tax scheme to take advantage of what we expect to be lower rates.”

What does this mean for your business planning? If you’re on the cusp of entering a higher tax bracket, book your business income this year rather than next to avoid paying higher rates. If you can afford it, it’s also a good time to take on bigger expenditures—and ask for an extension on your Paycheck Protection Program (PPP) loan, if you have one.

What I would recommend is for businesses to ask for an extension to [the PPP loans].

Natalie Rasmussen, senior tax manager at GreenGrowth CPAs

Apply for a PPP extension

Further complicating taxes this year are the emergency COVID-19 relief loans that were offered by the government. The guidance related to loan forgiveness and tax obligations related to PPP for small business owners has changed multiple times and is likely to change again in 2021.

“Companies that have received a PPP loan and used it to run their business are now getting to the point where they need to go back to their bank to show them how they spent it and ask for forgiveness,” said Rasmussen. “What I would recommend is for businesses to ask for an extension to that loan. There’s still no conclusive guidance from the IRS as to how they’re going to handle these loans.”

As it currently stands, a forgiven PPP loan is tax-exempt. However, using the loan can also reduce how much you can write off on your business taxes. Usually, expenses like payroll, rent and utilities are deductible from your normal taxable income, and that means you owe less tax at the end of the year.

This can be a double-edged sword, says Rasmussen. “If the loan is forgiven, and you used those funds for allowable, ordinary and necessary business expenses—payroll, utilities, etc.—does that mean those expenses are no longer deductible? There’s no guidance yet,” Rasmussen explained. She suggests that business owners file an extension to repay the loan in 2021, pushing out your deadline until the next administration can provide clarity around what is allowable and unallowable. This protects your business from a bigger tax burden down the road.

Understand how the CARES Act can help

Other parts of the CARES Act are clearer and more helpful when it comes to your business taxes. For instance, one provision allows businesses to claim current losses against past income declared in 2018 or 2019 for an immediate refund. “Under the CARES Act, if you’re going to have a large loss in adjusted gross income, you’re allowed to go back and recapture any tax that you paid in a prior year. The 1139 form is a pretty quick form that you can use to get a refund basically right away,” said Rasmussen.

The CARES Act also allows for a higher charitable donation deduction. “In an effort to encourage more charitable giving, the CARES Act allows you to deduct up to 100% of their adjusted gross income (AGI), which is your total income minus other deductions you have already taken, in qualified charitable donations if you plan to itemize their deductions,” wrote financial expert Dave Ramsey.

The CARES Act added a new “above-the-line” deduction giving your business the ability to write off up to $300 of charitable contributions that you made in cash. There’s still time this year to donate if you haven’t done so already.

What about new tax credits?

Tax return forms have not yet been released, so it’s not clear yet what the levels for certain deductions will be. However, you can plan for a few benefits deductions that were released in the COVID-19 relief legislation.

“After the CARES Act, there was something called the SECURE Act—a lot of that Act was focused on helping individuals, but there’s a really nice credit in there for small businesses with 100 employees or fewer,” said Rasmussen. “Unrelated businesses—for instance, a bowling alley, a restaurant and a pet shop—can combine forces under what’s called a multi-employer plan, MEP. This gives you a way to offer a retirement plan for your employees at a better rate, as well as gives you a tax credit. You get the amount back that it costs you to start. That will start in January 2021, but it’s a really nice thing to plan for next year.”

Likewise, business owners can also start to calculate any home office deductions and factor in other expenses that you may be able to claim as a result of your new remote work situation. Speak to a tax advisor or CPA who can help you anticipate some of these big changes.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published November 20, 2020