As a small business owner, you might wonder when the fiscal year 2021 begins and ends. What impact might tax changes have on your burden? Having a good handle on finances helps you save money and meet obligations without penalties.
The Internal Revenue Service (IRS) reports around 28% of all individual income tax returns included some business income or loss. The average tax rate was about 18.7%. Because reports run a couple of years behind, the impact of the fiscal year 2021 may be a bit different.
President Biden proposes a 7% tax hike on corporations, going from 21% to 28%. The increase may impact some small business owners who formed as corporations, as well as those using pass-through structures and making over $400,000 per year. Should the bill pass for the fiscal year 2021, be prepared to pay a bit more if your business falls into one of these categories.
Of course, there are some things you should be doing anyway as a small business owner to prepare for tax time. Here are the steps to take to stay on top of things.
1. Pay Estimated Taxes
Underpaying on taxes throughout the year might result in penalties. One of the top things you can do to lower the impact of the fiscal year 2021 is to pay your quarterly taxes.
How do you know how much to pay in each quarter, though? There are different schools of thought. One way is looking at your 2020 tax burden, dividing by four and sending in equal payments. Unfortunately, this doesn’t always work as your business profit from year to year can vary widely.
Another option is to figure out your tax percentage and pay the amount based on quarterly profitsWhatever way you decide to divide your payments, keep the money in a separate account and pay it on time to avoid penalties.
2. Maintain Cash Flow
One of the biggest challenges small business owners face is maintaining a steady cash flow. Without funding, you can’t pay your employees, order new inventory or market your company. Research shows about 33% of businesses feel cash flow is their greatest challenge.
What if it’s time to pay your estimated taxes, but your clients haven’t paid you? How do you juggle the tax burden and keep enough cash on hand to operate? The problem is a tough one. Sometimes you will have to put off paying your quarterly taxes to make payroll.
Your best strategy is to delay payment, but the minute the client pays their bill to go ahead and send in your estimated payment. If questioned, you may have to show how much came in at different points throughout the year, so keep careful records for the fiscal year 2021.
3. Study PPP Loans
Are you one of the businesses that took out a Paycheck Protection Program (PPP) loan? You have to meet certain obligations, or you’ll need to pay it back at a higher rate. For example, you may need to show some of the money went to paying employees.
According to Business News Daily, the loan is forgivable if you used the funds to cover payroll, rent or mortgage and utilities. The government won’t consider PPP taxable income unless you used it for other purposes. Still, it might be wise to plan ahead in case you find you do owe taxes on the infusion of cash for the fiscal year 2021.
4. Understand the ERTC
The Employee Retention Tax Credit (ERTC) seeks to help companies retain employees and avoid temporary layoffs. The ERTC lets businesses claim a tax credit of up to 50% of qualifying wages or as much as $10,000 per employee between March 13, 2020 and January 1, 2021. Depending on how your calendar falls, the fiscal year 2021 could be impacted.
If COVID shutdowns reduced your income considerably, determine if you qualify for the ERTC credit. It’s a good idea to enlist the help of a tax professional to ensure you file for the proper credits.
5. Claim First-Year Bonus Depreciation
If you made any significant equipment purchases during the fiscal year 2021, you could claim a 100% deduction rather than taking a gradual depreciation. The law passed in 2017 and is still in effect at this time.
Reduce your tax burden considerably by making large-item buys during years where profits are higher.
6. Hire an Accountant
If you can’t afford a full-time accountant, at least share your records with them at crucial points throughout the year to make sure you’re on track with your estimated payments. Choose one specializing in small businesses. They’ll be able to guide you and save you money on how much you pay out to Uncle Sam.
There are many freelance services available. Pay them to give you feedback until you can afford a full-time CPA to handle your accounts.
7. Be Aware of Higher Standard Deductions
One big change in 2021 is the adjusted tax rate table to reflect the increase in inflation. Since many businesses file their taxes as part of their individual income on a 1040, you’ll have to pay based on what you make if married filing jointly. The combined total can increase the tax burden for a small business making less but putting them over the limit with the spouse’s income.
In addition, you’ll need to pay self-employment taxes, which adds to your overall burden. The higher standard deduction means you’ll itemized elements might not reduce what you owe. For example, the interest you pay on your mortgage may not be enough to claim when the standard deduction winds up being more.
Know the Laws
The tax rules change almost every year. Be aware of changes and how to take advantage of any deductions or credits. There is no reason to pay a penny more in taxes than you have to.
While you want to follow the letter of the law and make sure you pay what you do owe promptly, you don’t want to give your hard-earned dollars to the government to hold onto. If you find you’re getting a significant tax return every year, you need to make adjustments to keep more of your brand’s profit in the business. If you owe at the end of the year, you should pay more throughout the fiscal year 2021. It’s all a balancing act.