This year has been crazy for business owners. Some have too much to do and many others were closed down. Small Business Owners put blood, sweat and tears into their business every day. Now is the time to plan to understand and minimize your tax bill.
Business Opportunities & Issues
Invest in equipment. Need to place in service these assets by December 31. A business can write it off under tax code sec 179 up to $1,000,000. Wisconsin does not allow bonus depreciation but does follow Federal Sec 179 limits.
Invest in a company vehicle. If you use your vehicle more than 50% for business consider buying one in the business. Depreciation is $18,100 for 2020, $16,100 for year 2, $9,700 for year 3 and $5,760 for year 4 and thereafter. The personal portion should be added to your taxable wages before the end of the year.
Establish or expand a retirement plan. For those just starting you may be able to claim a tax credit for setup costs of SEP, SIMPLE IRA or qualified plan. Consider making a discretionary profit-sharing contribution. To be tax deductible the contribution must be made no later that the tax return file date.
Maximize the new deduction for pass-through income. You could avoid paying taxes on 20% of your business income. The calculation is complex and can be an all or nothing option – so plan ahead.
Review the SBA funding you received this year to determine what is taxable. The PPP loan isn’t taxable, however if the loan is forgiven the expenses paid are not tax deductible. If the SBA made 6 months of your prior SBA loan payments, the principle payments are considered taxable income. The Economic Injury Disaster Grant is taxable income, along with the WEDC We’re all in Small Business Grant.
Claim All Your Expenses and Tax Credits
Vehicle expenses. You can choose between deducting the business portion of the actual costs or deduct 57.5 cents per business mile. A written mileage log of business and personal miles is required.
Hire family. If you have children or other family members that assist with the business, it is possible to shift the income to someone with a lower tax bracket. Remember the wages must be reasonable given their age and work skills.
Office in the home. If you work out of your home in a space used exclusively for business you can write off a prorated amount of your home costs. The deduction is limited to the taxable income, though costs can be carried forward.
For small business owners it is impossible to separate personal and business tax planning.
It is critical to consider your personal and business circumstances before implementing any ideas.
By Mary Guldan-Lindstrom, CPA