Filing Taxes in 2021 for Small Businesses
There is an old saying that there are only two things that are guaranteed in life: “Dying and Paying Taxes.” Well, it is my opinion that there is one more item to add, and that is that changes to tax code are guaranteed to take place. This is a quick primer regarding paying taxes in 2021. We will include the key reminders for small businesses in filing taxes, and then will mention some items to check on in filing your taxes. These reminders will primarily assist you as you talk with your accountant or tax professional as they prepare your taxes.
Types of Taxes and Filings for Small Businesses
- Income Tax—Small businesses file annual tax returns. Except for C Corporations, income taxes generally pass through to the owners and would be filed as a part of one’s individual tax return. And partnerships file information returns.
- Self-Employment Tax—This type of tax is applied to net earnings from self-employment and is applied toward social security and Medicare obligations.
- Employment Taxes—If your business has employees you will need to file forms and taxes related to their Social Security and Medicare Taxes, plus their federal income tax withholdings and federal unemployment tax. This includes payroll taxes.
- Excise Taxes—This category includes a variety of different taxes depending on the products that you sell, items of equipment that you use, the type of facility that you have, etc. It is a broad category, an example of which would be taxes on tobacco, alcohol or fuel. Make sure that you work with your accountant on any taxes that are due from this category.
- Estimated Taxes—These fall more in the category of tax filings. Most businesses must make payments toward their final taxes for the year in quarterly installments. The government realizes that circumstances can change and that they are more likely to collect all the taxes that you owe if you pay them sooner rather than later.
We are all aware of how far-reaching the coronavirus pandemic has been, including economic impact. Several programs were put into place to provide economic aid to taxpayers, including small businesses. Here are some actions that can impact your tax filings from the tax year 2020.
- CARES Act—Also known as the Coronavirus Aid, Relief, and Economic Security Act, this program introduced the Paycheck Protection program that provided money to small businesses as a forgiveable loan as long as the money was a applied to funding payroll, rent/mortgage, and utility payments. Money that was correctly applied during 2020 is not taxable, and any money that was not used for the intended categories is classified as taxable business income.
- ERTC—The Employee Retention Tax Credit is for businesses affected by the pandemic to use to retain staff members. Qualifying businesses are those who were fully or partially closed due to government-mandated shutdowns or experienced 50% or greater decline in gross revenue compared to 2019. These tax credits apply to the time between March 13, 2020 and December 31, 2020. Work with your accountant if these qualifications apply to you, or you must file inclusive of the government aid received.
- FFCRA—The Families First Coronavirus Response Act applies to businesses who were required to provide sick/family leave to employees affected by Covid-19. If your business was required to provide this relief, you should have a 100% of the cost of the leave in tax credits.
- Business Interest expense deduction increases—This increases the allowable deduction for business interest expense from 30% to 50%
Before concluding, we also encourage you to work with your accountant regarding additional deductions and tax rate reductions for small businesses. Recent laws have allowed for pass through entities to receive a 20% deduction on taxes, and for C-Corporations tax rates to be reduced from 35% to 21%.
Additionally, in many cases, businesses can take the full depreciation deduction during the year of purchase of the depreciable item. This can work to the advantage of the business if they have sufficient income to offset the deduction. Otherwise, spreading the depreciation deduction over time will be more advantageous.
We also encourage you to check for any filing deadline changes, there have been some changes particularly for businesses that are required to file quarterly estimated taxes.
Please remember, fellow business owners, that failing to know about a tax change does not exempt us from abiding by the new laws. Work with accountants who are familiar with your type of business, and make sure that you claim all the deductions and credits that your business is entitled to. The IRS will let you have the deduction if you file properly, but they are not going to look for deductions that you neglected to claim. That is the responsibility of each business owners.