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Come January 3, a new Congress will convene in Washington, DC, setting the stage for potential tax changes that could affect small and medium-sized businesses. With that in mind, it is important for businesses to engage in some tax planning strategies and take advantage of tax credits that are about to expire or disappear.
The Employee Retention Credit (ERC) is one such credit. Created in 2020 to provide economic relief during the Covid-19 pandemic, the ERC allows businesses to claim thousands of dollars in refundable tax credits to cover losses experienced in 2020 and 2021 while they continue to pay employees. Businesses subject to a full or partial closure or significant reduction in gross receipts may be eligible.
Many small and midsize businesses I know qualify for two quarters or more credits, which could amount to as much as $7,000 per quarter per employee in 2020, with higher limits per employee in 2021. But the time frame to obtain this credit is decreasing. Start planning now.
Businesses have only three years from when they file their 2020 and 2021 quarterly tax returns to claim the credit. Even if you have received funds from the Paycheck Protection Program (PPP) in the past you may qualify for the ERC credit, but you will need time to gather all the necessary documentation before filing the required amended return.
Related article: How to Get Employee Retention Tax Credit (ERTC) Under Second Round of Covid Relief
Beware of companies that advertise large ERC payments that are “too good to be true,” the IRS said in a special warning. The agency further warned that “improper ERC claims may result in taxpayers having to repay the credit along with penalties and interest.”
Find out how to find someone who can help you if you have a problem. I have a client who signed a contract with a firm that promised an ERC credit twice as large as we planned with lifetime audit protection, but the company was skeptical about how to handle future audits and did not list addresses and phone number. A red flag for sure, and a reminder that taxpayers should be less greedy.
The importance of tax planning
How many business owners can honestly say that their accountants advise them on tax planning, such as the ERC benefit, instead of just doing their taxes? Have you built a foundation of tax strategy that produces recurring savings year after year?
Take the initiative and ask your accountant what their plans are to generate savings each year, plus what strategies they use to accomplish that.
Don’t make the mistake of just asking your accountant how you can save on taxes before the end of the year. If you do, you may be advised to buy a car for your business because the cost can be completely eliminated with a reduced bonus. This is not an example of a good, thoughtful tax strategy. And that particular deduction, as such, will lose 20% of its value in each of the next four years, starting in 2023. It will disappear completely in 2027.
Related article: How to Give Your Own Tax Cuts
Accountants should have several strategies to help small and midsize businesses and their owners save on taxes. For example, ask yours about research and development credits, or credits for hiring veterans and disabled individuals and members of other groups identified by the government as facing barriers. in employment.
How to avoid an audit
It’s more important than ever to use only legal means to limit your tax liability. Here is a list of some dos and don’ts:
- Don’t put your family vacation on your company’s books. If there is a business purpose for a partial business/family trip and that purpose covers more than 50% of the trip, document it and split your expenses. Include notes about the purpose of the trip, your itinerary, agendas of meetings and conferences, who you met, etc. The IRS has increased the record-keeping requirements for travel deductions.
- Keep original receipts, not just credit card statements. Taxpayers often assume that a credit card statement constitutes a receipt. It doesn’t exist. Your expense items on a credit card receipt alone will probably not be denied.
- Get in the habit of documenting all relevant expenses as you incur them; and consider assigning an employee for that purpose or using technology. You must document the business reasons for the deductions claimed because there are increased documentation requirements for business travel and for meals. You probably won’t remember all the necessary details when the IRS audits you two or three years after an event. If you fail to document actual expenses, you must deduct the published IRS travel per diem in the city.
- Do not pay personal expenses through your company. Write yourself a check from the company for a legitimate reason such as salary, wages or distribution. Then pay personal bills for your mortgage and electricity bills YOUR checkbook, not the company.
Related article: IRS Hates Businessmen to Tell Anything About Taxes.
The messages sink in slowly. Four clients have so far told me that they completely changed their internal processes to get better records. They take the time to do it now because they know it could be dangerous in the future.
No one knows what tax changes, if any, are in store, but there are already changes on the books that business owners should be aware of, including benefits that destined to disappear. Act now before it’s too late.