If there is anything certain in life, it has to be the taxes. Even in the year 2020 where the pandemic has turned the world upside down, tax filing for businesses is a sure thing that must be carefully complied with. However, the upside of 2020 is that a business can make use of tax provisions and privileges granted by CARES Act to reduce the damage caused by the loss of business due to the pandemic.
Add reliable and essential tax strategies you can reduce your tax liability and save sizeable money i.e. when you need it the most in 2021. If you are a new business trying to figure out the way ahead for tax season 2020-21, Outsourced Bookkeeping is here to help you. In a series of blog posts starting with this tax planning strategies, we are going to help you figure the best way to make tax savings for 2020-21. So here are 5 tax planning strategies for an efficient tax season:
Claim Tax Deductions for Bad Debts:
Every business at some point in time suffers from bad debt which is the amount of uncollectable amount that is owed by the customers for the goods and services rendered by your business.
A businesses’ Accounts Receivables are not always wholly collected and are rarely settled due to variety of reasons; sometimes there arise irreconcilable differences on payments, few customers may evade the payment even after tireless pursual by your recovery department. These bad debts can include loans to suppliers or clients, sales to customers on credit or guarantees on business loans.
While you already lose the amount you are owed paying taxes on the amount you have not collected becomes a burden if your business is rife with bad debts. However, you can lower our burden by writing off these bad debts and can claim a tax deduction. You can write off these bad loans and taken off the income at the year’s end if you are using the accrual method of accounting.
Prepare accounts receivable ageing report to list out all the customers and total uncollectable amount by the end of the year & include this total bad debt on the tax return you file. However, you have to wait until the end of the year and have to make all efforts to collect the amount to establish the amount as a bad debt and this is only possible if you are using accrual-based accounting method.
Writing down or Writing off Inventory & Obsolete Equipment to Reduce Tax Liability:
Obsolete Inventory has always been a pain for the business: it provides no value and takes up space prodding business to lose money just by holding to them. Yet they can be still useful to reduce your tax liability in multiple ways, be it they are completely obsolete or got their value hit due to change in market demands, damage or even natural deterioration over time, using write-offs or write-downs respectively.
Equipment or machinery or any other company property is considered obsolete when it is not used and is taken out of the list of assets from the company’s balance sheet. This asset can be physical (equipment, machinery or vehicle), or even technological or technical asset that has been updated by a newer model.
You can make a list of all the equipment and mark them as obsolete, damaged and damaged yet usable category based on their working condition. Obsolete equipment can be listed under the write-off section, equipment that is damaged yet are usable can be listed under the write down section with their reduction in value. The total amount that accounts to these write-offs and write-downs can be used to reduce the tax liability.
Time the Expenses & Income Strategically:
Expenses reduce the tax and additional income does attract an extra tax and timing them is the key to optimize your tax liability to benefit your savings. If taking income this year or the next is the choice you have, you can time the income based on which year your profit is lower. And when it comes to expenses, you can shift them to the year when the profit higher and deduction is on the larger side.
You can also consider the tax bracket and tax rate variations to time the income and expenses. If you fall in a higher tax bracket or tend to pay higher tax next year, you can direct your income into this year and postpone expense to next year, and vice versa. Seek advice from your tax advisor with clear information on the tax rates and deductions that are bound to change with CARES Act. So next two tax strategies you can put in place for your business in 2020 are closely related to the CARES Act.
CARES Act & Tax Implications:
The economic disaster befell on the businesses around the world has pushed the world into a brink of recession with almost all business suffering huge losses. And CARES Act with relief packages, tax benefits, Pay check Protection Programmes and quick business loans was brought in place to aid American businesses and households stay ashore during the pandemic. In addition to Economy Disaster Injury Loans, Pay check Protection Programs that provide the necessary help to business continue their operations and payroll, CARES Act has also provided tax benefits for businesses.
4&5. NOL Privileges, Increase in Business Interest Limit:
If you are a business that has been impacted by the pandemic there are plenty of ways you can benefit from the CARES Act to offset your damage with tax benefits. For example, the CARES Act provides a 5-year Net Operating Loss carry back for tax payers helping them to benefit from the tax refunds. For the losses caused during the pandemic (applies for 2018-2020) the Net Operating Loss of the business can be used to offset hundred per cent of the taxable income and the loss generated in 2020 can be considered to procure back the taxes paid by the business in prior years. Amount of interest that can be deducted in also increased from 50% from 30% of the adjusted taxable income for 2019 &2020.
Add this to the deferral of employee social security tax, businesses can give a boost to the cash flow and decrease their tax liability comfortably, but only if they have any additional help from tax professional well versed and experienced in the new tax rule and provisions for the year 2020. At Outsourced Bookkeeping, we have been helping hundreds of small and medium businesses benefit from tax provisions to improve their savings and can help you too. In addition to offering Remote Bookkeeping, Accounts Payable, Credit & Bank Reconciliation & Complete Remote Accounting, our back-office accounting firm is also offering tax filing for small and medium business for years now. For any help with tax preparation and filing, you can contact us here: https://outsourcedbookeeping.com/