5 Things Every Small Business Owner Should Consider for Their 2020 Tax Filings

By Adriaan Brits Thursday, June 25, 2020

The majority of the measures you might have taken for your previous tax filing expired on Dec. 31, but not all of them. There are still several actions that taxpayers should take before July 15 to help minimize the blow. Some have been available to taxpayers for years, while others stem from last year's Tax Cuts and Jobs Act.

Here are five things you should consider for this year’s tax filing:

1. Contributions to Individual Pensionable Accounts.

Taxpayers also can make tax-deductible IRA contributions. Contrary to 401(k) contributions to be made by year-end, taxpayers have to contribute to their IRAs before Apr. 15 and then exclude them from taxes for 2019.

When you are not taking part in a corporate retirement scheme, you can subtract up to $5,500 in IRA contributions and make an extra $1,000 "catch-up" payment if you are over 50 years old. If you're working in a 401(k ) plan, you can still deduct IRA contributions to the full $5,500 limit if you're under $63,000 adjusted for gross income. The deduction phases out between $63,000 and $73,000 for taxpayers with income and disappears above that level of income.

2. Living "In the Zones"

In the Tax Cuts and Jobs Act, one of the job-creating incentives is to create more than 8,700 "opportunity zones" at low income. Individuals or companies that invest through eligible funds in these zones may delay or postpone taxes on capital gains they have made elsewhere.

For instance, if you sell a $100,000 stock portfolio that has produced $50,000 in capital gains, you'd owe as much as $10,000 in gain taxes depending on your income level. If investors roll the benefit into a qualified opportunity fund, they may defer the taxes due until 2026 or until the new investment is sold. They can also lower the taxable gain if they hold the investment for a minimum of five years. The longer the holding period, the more taxable the gain reduction will be.

3. Changes to Accounting Systems

Self-employed taxpayers and small business owners can save taxes by changing the accounting method for their business from an accrual basis to a cash basis, or vice versa. Any business with gross receipts of under $25 million this year can change its accounting method.

Switching from an accrual basis, recognizing income when it is earned to a cash basis, and accepting it when paid, will cut taxable income from 2019. Taxpayers may adjust in either direction irrespective of the type of accounting they used in the prior year. The difference and the taxes thereon can be significant, depending on the nature of the income you raised and when you got it.

4. Qualified Business Deduction

One of the main benefits of the Tax Cuts and Jobs Act for small businesses is the new 20% eligible company deduction. If a sole proprietor or business owner earns less than $315,000 in income, they can take a full 20% income deduction before their other deductions are set out. The value of the deduction decreases over that amount of income and falls to zero above $415,000 in revenue.

While small business owners are unable to make any investments that would change the size of the 2019 deduction they can take, they can take steps to lower their income to fall below the threshold of $315,000.

5. Tax Deduction Revisions

While it won’t change your tax situation for the last year, it always makes sense for taxpayers to plan for this year sooner rather than later. The primary goal for many taxpayers is likely to adjust their W-4 tax deductions schedules with their employers. This year's tax refunds are way down, and many people are very unpleasantly shocked to find out they owe more taxes to the government.

People usually saw their paychecks rise last year thanks to marginal tax rate cuts, but in many cases, improvements to the withholding plans left taxpayers owing more money at year-end. Act now to avoid yet another unpleasant experience next year.

About the Author

Headshot for author Adriaan Brits
As an analyst of global affairs, Adriaan has an MSC from Oxford, with diverse interests in the digital economy, entertainment, and business. He is a specialist trainer in Advanced Analytics & Media.

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