2021 Tax Strategies for Small Businesses

Evaluate the Entity you Choose Strategically

Small businesses have several options for their business structure to understand tax strategies. There are several types of small businesses that a small business owner can form, such as a sole proprietorship, a partnership, a limited liability company, or a corporation. How a business is incorporated impacts its taxation and deductions.

It is a good time to evaluate your current business structure to maximize tax savings if you have recently started a business or have an established one. 

 

Sole proprietorship vs. Pass-Through vs. Corporation

A sole proprietorship with no business structure is formed when you start a new business alone without incorporation. You do not need to consider an LLC if you are running a sole proprietorship with no other partners. That LLC is regarded as a sole proprietorship for federal tax purposes and is reported on Schedule C as part of your personal income tax return. Often, this is the case for a start-up and is a reasonable strategy for reducing legal and accounting expenses in the early stages of a company’s life.

 

Get the most out of new tax rules through tax strategies

The new COVID-19 pandemic laws provide businesses with a number of tax-saving opportunities. These new rules should be reviewed by all business owners to take advantage of all opportunities. In 2021 and 2022, a temporary exception will be made to the limit for meals expenses

Business meals can be deducted at 50% of cost under current tax laws, while business expenses incurred for business can be deducted at full cost. Currently, restaurants can deduct 100% of the food or beverage they serve as part of their business expenses. The Taxpayer Certainty and Disaster Relief Act of 2020 added a temporary exception to the 50% limit.

 

Relaxed NOL Limits

The net operating loss of a business is the difference between its deductible expenses and its taxable income. TCJA (Taxes Cuts and Jobs Act of 2017) removed the ability to carry NOLs back two years and added a new rule limiting the offset to 80% of taxable income. Generally, the TCJA is less friendly to businesses since carryback has been removed and offset amounts are more restricted. The Coronavirus Aid, Relief and Economic Security (CARES) Act temporarily lifted the TCJA’s restrictions on NOLs. Taxpayers are allowed to carry back NOLs from 2018 to 2020 under the CARES Act, but they can also elect to only carry forward NOLs. After 2020, taxpayers cannot carry back NOLs. 

 

Donations (cash) are deductible at a higher rate

For corporate donors, the AGI limit remains increased. As a part of tax strategies, the CARES Act will allow corporations to deduct up to 25 % of taxable income (formerly 10 %) starting in 2021. Contributions to eligible public charities can still be made by an individual taxpayer up to 100 percent of their adjusted gross income (AGI). Taxpayers who make cash contributions in 2021 will be able to deduct 100 % of their AGI (previously 60 %). In the case of sole proprietorships or pass-through entities, cash contributions from businesses will be more beneficial.

 

Disclosures

Securities offered through Securities America, Inc., member FINRA (www.finra.org)/SIPC/www.sipc.org), a separate entity. Lee Michael Murphy is licensed with the CaliforniaDepartment of Insurance, License 0H18660. Lee Michael Murphy is an Investment Advisor Representative with Securities America Advisors, a registered investment advisor The Free Retiree, Securities America Advisors, and Securities America Incorporated are separate entities. Career advisor Sergio Patterson, attorney Matt McElroy are not affiliated with Securities America Advisors or Securities America Incorporated. Securities America Advisors, Securities America Incorporated, and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.

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