The past several years have been riddled with lots of tax law changes. Some of them may affect you and your business and some may not.
But as a business owner, it is your responsibility to know what affects you and what doesn’t.
Unfortunately you do not get mail to update you on the laws and regulations that have changed, every time there is a change.
So you either have to do the research yourself, or have someone else in your corner that can help you with these tax law changes.
During my auditor career, I audited a business who was subject to several tax law changes during the course of my audit. He tried to claim he didn’t make changes for the laws because he was never specifically notified by the government that he had to make changes.
Unfortunately that excuse doesn’t hold up. He was still responsible for all of the changes that arose due to his business not following the changes.
And the same holds true for you and your business. No one is going to send you a letter letting you know of the changes. You must learn of these changes yourself and figure out how they apply to your business.
But I don’t understand the laws or the accounting or legal speak, you say.
So your next option is to find an accountant who can easily provide these changes to you and explain them as they apply to your business.
2020 has a few more changes thanks to Coronavirus legislation and more things that are part of the 2017 Tax Cuts and Jobs Act.
So let’s look at the tax law changes that affect your 2020 tax returns:
Carry back losses for up to 5 years.
This is mainly for C Corporations to be able to get some refund money to help their businesses stay afloat. Yep, we’re looking at the big guys, so much us little guys with this part of the legislation.
Losses that you have this year, can be carried back for up to 5 years to reduce the taxable amount of profit for those years. And give you a cash refund in the process.
The same can be done for both 2018 and 2019, as well.
So you can go back as far as 2013 to apply the losses for your business.
BUT if the business was not in operation at that time, you can’t take the losses in those years. For example, if your business started in 2016, you can’t take losses prior to 2016.
But this also comes with a few drawbacks.
The biggest drawback is that when you refile these tax returns, you are now opening up the statutory limit, which is usually 3 years. For example, you are going to file the 2020 tax return soon. So that means you can only be audited back to 2017 right now. But if you refile the tax returns to take the losses incurred in 2020 (2019 and 2018), you are now opening up those years to audited as well.
You’ll also need to talk to a tax professional to see what is the best option for you.
Changes to the Meal and Entertainment Deduction
The new tax law has eliminated the deduction for entertainment, amusement and recreation activities.
You can still take the meal deduction, as long as you or an employee are present for the meal with a client or potential client and the food and beverages aren’t “lavish or extravagant.” The meals must be for current or potential clients, customers, consultants or other business contacts. You can’t be eating a meal alone for this deduction.
And the deduction is still only 50% deductible.
The Small Business Deduction
If your business is a sole proprietor, LLC, S Corporation or a partnership, it is known as a pass through entity. What that means is that the income is actually taxed at the personal level, not the business level, so you are subject to the personal income tax rates, not the business income tax rates.
But one of the big changes to help these businesses was the Small Business Deduction or Section 199A.
As part of this deduction, business owners of pass through entities can now claim a 20% deduction on their share of the business’s income up to $326,600 in 2020 for married filing jointly ($163,300 for all other filers). Remember this is income, not total revenue.
If the taxable income is greater than $426,600 for joint filers ($213,300 for all other filers), no deduction is allowed.
What this means for you is that this deduction reduces the total amount of YOUR taxable income on your return by up to 20%.
This is a deduction that you will need to sit down with your tax preparer to discuss further.
Right now these provisions are set to expire in 2025 without further legislation.
In 2020, you can now deduct up to $300 of charitable contributions on your personal tax return.
In prior years, you would claim the charitable contribution deduction under your itemized deductions. In 2020, you can now claim up to $300 without using the itemized deduction claim.
Estimated Tax Payments
If you are going to end up owing more than $1000 in tax for the year, then you are required to pay estimated taxes.
Usually these estimated tax payments are set in 4 equal payments that you would make on the due dates. But when your income fluctuates and it’s not easily estimatable, then you can make payments that aren’t the same amount each quarter, they are based off your total income.
Also, the IRS is generally waiving the estimated tax penalty (when you fail to make the estimated tax payments) for anyone who has paid at least 85% of the total tax due throughout the year with estimated payments.
Taxes are not anyone’s favorite topic
I’m not sure I know of anyone who actually likes taxes (even I don't like taxes). But as a business owner, you are still responsible for the taxes and for knowing the laws.
I’m hoping that I am able to at least ease some of your confusion.
Taxes are also not a once a year thing. They are happening all year long. The laws are constantly changing and aren’t that easy or fun to read. You just need to make sure that you know what affects your business and what doesn’t affect your business. That’s just part of being a business owner.
All information on this site is provided for general education purposes only and may not reflect recent changes in federal or state laws. It is not intended to be relied upon as legal, accounting, or tax advice. We strongly encourage you to always consult with a tax or accounting professional about your specific situation before taking any action. Please read our full disclaimer regarding this topic.
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