Many businesses dread tax season. It’s a lot of paperwork, time, stress, and may even require money to be sent to the government which can hurt overall cash flow. Yes, tax season is a vulgar term in many business circles. However, tax season doesn’t have to be scary. For businesses preparing their 2020 taxes, there are a lot of benefits that can be used to help offset any taxes owing or capitalize on unfortunate events like business losses.
Understanding the tax benefits available, how to make the most of them, and what’s needed is essential to making tax season flow a lot more smoothly.
For many businesses, equipment like printers, scanners, copiers, and the various supplies needed to keep these machines operating are essential. While best efforts can be taken to reduce printing needs, for example, completely eliminating the cost is nearly impossible in many cases. Luckily, these costs can sometimes be deducted when filing small business taxes.
If the devices and supplies are used for business purposes, it’s important to keep all related receipts for when it comes time to file 2020 taxes. The cost for supplies can be written off as a business expense.
Writing off equipment is a little more complex but nothing to be afraid of. Large ticket items like a multifunction printer are written off using the depreciation formula. This is simply the total cost of the asset divided by the expected usable lifetime of the asset. This formula allows the expense to be claimed over a number of years and can help soften the blow once tax season rolls around.
The COVID-19 pandemic has been a major challenge for businesses across the county. Small business owners and operators have been especially hard hit. One estimate suggests over 100,000 small businesses are now completely out of business due to COVID-19. The CARES Act is a business support piece of legislation designed to help businesses get through these challenging times. Many features of the CARES Act are directly related to 2020 taxes and offer emergency supports for businesses when filing.
Businesses are able to claim up to 100% net operating loss (previously capped at 80%) to entirely offset income. These losses can also be carried back up to 5 years prior. This means that businesses which may be operating at a loss greater than 100% of income for 2020 can carry back additional unclaimed losses to years where taxes may have been owed. Ultimately, this could result in a very significant tax refund for some businesses and provide them a much-needed cash injection to weather the coming months as COVID-19 continues to impact the economy.
Interest expenses can also be deducted up to 50% from the previous 30% limit. It’s not uncommon for a small business, especially one that’s just getting started or focusing on growth, to be funded largely by debt. Many other businesses may have been forced to take on debt to stay afloat during the pandemic. By allowing additional interest expenses to be deducted, this can help lower the net cost of borrowing for businesses and maybe encourage others to take on some debt in order to maintain operations until things normalize.
With so many businesses and individuals struggling, there may be some bad debts on the books that simply cannot be collected. The business in question may have closed and stopped operations and, therefore, will not be paying their invoice owed. This is considered a bad debt and can be written off. While this is not anything new for 2020, it may be of more importance this year as businesses sit on unpaid invoices from individuals or companies who simply cannot pay.
This deduction could prove to be valuable as many businesses shifted to remote work during lockdowns. For 2020 taxes, home office expenses may very likely be the most common deduction businesses are looking at when filing. It’s important to ensure that the home office is a dedicated space used only for work. If that’s the case, businesses can deduct things like a portion of the utilities, rent, mortgage interest, and more. For some small business owners forced to juggle their life and manage their business from home, being able to claim this deduction may be the silver lining from an otherwise rocky year.
This has been an unprecedented year. Thankfully, there is hope on the horizon and small businesses have opportunities to get the support they need come tax time. Of course, it’s always advisable to consult a tax professional when filing to ensure everything is in order and you’re making the most of the available deductions.
For more support in tax time, like managing those countless receipts, invoices, and documents, the experts at Virginia Business Systems are always available to help.