Tax season can be a challenging time for business owners, particularly after the pandemic-related tax changes of recent years. In this article, read tips for avoiding common pitfalls and discover tax opportunities that could benefit your business going forward.
Managing your business taxes may not be your favorite part of owning your own small business. But with a clear plan in place and a knowledge of key developments in the tax landscape, this obligation can become a real opportunity to benefit your business’s bottom line. And, while you may file your taxes in the spring, an effective tax strategy for your business requires year-round support. Read on for tips and insights to keep in mind this tax season and throughout the year.
Know when you need to file
The confusion brought on by the pandemic caused The Internal Revenue Service (IRS) to push tax filing deadlines in 2020 and 2021, but this year marks a return to normal for traditional tax season deadlines. The IRS announced that S corporations and partnerships must file and pay any federal small business taxes owed by March 15, 2022; individuals and most corporations must file and pay by April 18, 2022. Though any of the above groups could request a filing extension through October 17, 2022, it is important to remember that is not an extension of when payment is due.
Confirm you have accurate paperwork for employees and contractors
Because contractor and employee classifications are determined based on the financial and behavioral aspects of the work relationship, they’re often misunderstood, especially if the relationship changes over time. Misclassifying workers (even unintentionally) could result in fines, penalties, and back tax liability.
Review your employee/contractor classifications and make sure that they are accurate based on the work performed thus far, and how you expect to use their services going forward. Once you’ve done that, make sure you have the relevant, tax-related paperwork completed, signed, and on file (ideally by the middle of the year). You need a completed Form W-4 before you issue an employee’s first paycheck, so you can report employment-related tax information according to IRS’ semi-weekly or monthly due dates. For independent contractors, secure a completed Form W-9.
If you hire someone to perform professional services—like an attorney or an accountant— and pay them more than $600 in a tax year, you must have them complete a Form 1099-NEC by January 31st of the year following payment.
Budget for taxes
Your estimated small business taxes owed are calculated based on the accounting method your business uses, but be financially prepared to make four estimated and equal quarterly tax payments to the Internal Revenue Service throughout the year. Because there are fines and penalties assessed for not making timely payments, and/or being significantly “under” in the estimated taxes you pay throughout the year compared to your actual income, it’s wise to establish a separate bank account dedicated to tax obligations; make regular contributions for your next quarterly tax payment based on the payments your business receives throughout that quarter.
The more accurate your estimated payments are, the better you can manage potential penalties and interest charges for underpayment. (Depending on the type of business you run, you may also be responsible for payroll, sales, and excise taxes.)
Plan equipment purchases
Know you’ll want to invest in business-related equipment like software, a vehicle, or furniture? Plan your purchases with Section 179 in mind. This business tax deduction is designed to encourage small to midsize business owners to invest in themselves, by allowing the deduction of the full cost of new or used equipment up to $1,080,000 (for the 2022 tax season, or $1,050,000 for the 2021 tax season) from the businesses’ taxable income—all in one shot. It does include a $2.7 million spending cap and benefits phase out after this point, but it is among the most significant business tax deductions you can lean on to grow your business.
Given the supply chain issues that have hindered a range of industries over the past few years, it’s important to plan your purchases early in the tax year to make sure you’re able to leverage Section 179. It applies to business equipment that was purchased, financed, leased, and put into service by 11:59 pm on December 31st of the applicable tax year.
Don’t underestimate the power of funding the future
Small business retirement plans may help you limit your personal tax liability, save for the future, and take business tax deductions for contributions you make to employee retirement accounts (including your own). Some plans like SEP-IRA’s require very little paperwork to establish, while SIMPLE IRA’s allow for employer and employee contributions but take longer to establish due to administrative complexity.
Explore tax changes that will soon expire
Every year brings some degree of changes to tax rules, but the pandemic in particular brought about a wave of changes—many of which will soon expire. Small business owners should look out for opportunities that they could still claim before they run out—and prepare for more expenses, in some cases. For example:
- Small business owners with fewer than 500 employees may want to explore the Employee Retention Credit, a fully refundable payroll tax credit that was created to give employers incentive to keep employees on their payroll during the pandemic. This one-time credit does not need to be paid back and allows those who did not take advantage to file for it retroactively. The benefit can now be claimed by a range of businesses, including startups and non-profits.
- Rules around how small business owners treat net operating losses (NOLs) have changed (again). With the 2017 Tax Cuts and Jobs Act, NOLs were limited to 80% of taxable income and could not be carried back. The CARES Act allowed business owners to carry back NOLs—and many business owners amended tax returns to do so. Now, rules around NOLs have returned to pre-pandemic times. These limits could mean business owners have to pay more income tax.
- If your business obtained a Paycheck Protection Program (PPP) loan that was forgiven, you may be required to file special reporting paperwork. (The forgiven PPP loan amount is not taxable). For federal taxes, business expenses paid with a PPP loan are also deductible—even if the loan was forgiven.
Keeping up with all the changes to small business taxes that have taken place over the last few years can be complex. But mapping out your tax strategy and how you will navigate these shifts can result in major cost-savings—for you and your business. As you consider how you approach your taxes to maximize potential benefits and grow your business, think about consulting a tax professional. They can work alongside your business to identify prosperous opportunities, and ensure you’re prepared for any new expenses that may arise.
To discuss additional strategies for maximizing your cash flow and achieving your business goals, contact your Senior Relationship Banker or get in touch with Santander today.
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