If there’s one thing you can say about Joe Biden is that, when it comes to tax increases, he’s a man of his word. He told the country during his campaign for president that he would be raising taxes. And he’s doing just that.
Maybe, because of the pandemic and Donald Trump’s antics, small business owners weren’t listening as closely as we should have been. But we better be listening now. That’s because taxes are going up and not just for the wealthy.
So what should you be doing to reduce your small business taxes ahead of the Biden increases?
• For starters, make sure to take advantage of every stimulus-related tax benefit available for your company this year if you’re eligible.
That means utilizing the Employee Retention Tax Credit each quarter if you’ve lost revenues or were shut down. It also means claiming a credit under the Families First Coronavirus Response Act if you’re paying for employees to take COVID-related time off. If you lost money this year (or in 2019 or 2018) make sure you’re taking advantage of the one-time opportunity to carry those losses back five years and get tax payments back. If you’re planning on hiring (let’s hope so) then fully leverage the Work Opportunity Tax Credit to offset compensation costs.
• Next, make plans to shift as much income as possible to 2021.
If President Biden’s tax proposals become law there’s a potential that some changes won’t take effect until 2022. Which may give you the opportunity to shift as much income to this year and for those with household income more than $400,000 that could mean big savings on what will be much higher individual and capital gains rates.
For small business owners filing “pass-through” returns it may also save money as the president has in the past proposed limiting the benefits from the Qualified Income Business Deduction for those higher earners and will likely include this in the second part of his plan.
• If you’re thinking of selling your business, better do it quick.
Our aging population, combined with a strong entrepreneurial desire for younger generations (startups increased more than 20 percent in the last quarter alone) has created an opportunity for baby boomers to sell their businesses and finally realize their dreams of retiring to Florida and hitting the links.
But be careful: President Biden will likely want to change how these transactions are taxed by eliminating certain rules allowing buyers to “step up” the cost basis of assets purchased, which could be a big discouragement for buyers. So if you can sell your business this year, try to get it done before this tax-disadvantage happens.
• Leverage low interest rates.
Thankfully, Mr. Biden has not mentioned changing the “accelerated depreciation” rules (fondly known as Section 179 of the IRS code by us accountants) which allows small businesses to immediately deduct as much as $1,050,000 (this year) of capital purchases (equipment, vehicles, technologies). So that’s great news.
What’s even better news is that the rule allows this deduction as long as the asset has been “put into service.” Which means that you can borrow money at what are still historically-low interest rates, finance the purchase, put the asset into service and take the full deduction this year without spending too much of your own cash.
• Minimize the “donut hole” effect by maximizing your retirement savings.
Thanks to 2019’s SECURE Act small businesses can get their costs of setting up a 401(k) plan for their employees reimbursed up to $5,000 and can also get an annual tax credit for automatically enrolling employees. The more your employees contribute, the more that higher-compensated individuals can contribute. Mr. Biden will likely propose a “donut hole” Social Security tax (the tax currently caps out at $137,700 and would pick up again for people earning more than $400,000).
Unfortunately, you still have to pay the Social Security tax regardless of how much you contribute to a retirement plan. But the more you and your employees contribute, the more you can defer your other individual taxes.
• Finally, clean up your balance sheet.
In a higher tax era, it’s important to maximize your deductions. You can’t deduct old receivables unless they’re written off and you can’t deduct old inventory unless it’s disposed. Too many of us carry these dead-weights for too long and we’re not only incurring more overhead but losing out on potential tax benefits by just getting rid of them.
The bottom line for business owners is that taxes are going to go up in the near future. You can wring your hands about this. But my smartest clients are putting their emotions aside and doing what good business people do: Strategize. They are meeting with their accountants now and making their plans to minimize what is for most of us the largest expense we have.
• Gene Marks, @genemarks, is a CPA and owner of The Marks Group, a technology and financial management consulting firm that specializes in small- and medium-sized companies.