There is nothing easy about running a business, and 2020 has proven to be an extremely challenging year. Many business owners have struggled to keep their operations afloat and worry about an uncertain future. As tax season approaches, they need to organize their affairs to prepare their returns for the IRS.
However, there are tax breaks that business owners can take advantage of, many of which have been around for years, and some instituted this year to address the burden of COVID-19.
Why have tax breaks?
The federal government’s tax collection arm, the Internal Revenue Service (IRS), is charged with ensuring that all individuals and businesses pay their taxes. This money is used to fund government activities, such as healthcare, education, and infrastructure development.
So, why would it offer tax breaks to businesses to reduce how much they pay? Tax breaks exist to stimulate economic growth and development. By allowing business owners to claim back some of their expenses, the IRS ensures they have sufficient funds remaining to invest in their enterprises. Additionally, business owners can utilize a tax relief attorney to secure other tax breaks allocated to companies in distress.
Types of tax breaks
Tax breaks come in four forms:
Exemptions occur when a business does not need to pay certain taxes. A reduction means that a company’s total tax bill lowers. Refunds and rebates return part of an organization’s taxes once the total tax bill is paid. Credits work like a points system, and companies can accumulate them, applying them to the current tax year or the next one.
Tax breaks have eligibility requirements that the IRS determines. These could include but are not limited to which industry the business operates in and how many jobs it creates.
Other thresholds that a company should meet could consist of a payroll or project investment minimum. The rules can seem overwhelming, and a business owner will benefit from consulting a tax lawyer when completing the company’s returns.
Claiming tax breaks
Business owners can claim deductions when completing tax returns. These relate to business expenses, like asset depreciation, professional services, salaries, office supplies, entertainment, contract labor, furniture, and equipment. These deductions are weighed against total income and expenses and the company’s profitability to determine the final tax amount owing.
When claiming deductibles like those mentioned above, documentary proof to substantiate them is necessary. If you cannot prove how you came to the totals you are claiming, you could be accused of attempting to defraud the IRS.
Do not leave this tiresome task to tax season. Instead, keep meticulous records so that you do not wind up scratching through boxes looking for paperwork, only to find it after you submitted your return without claiming because you lacked documentation.
Tax credits
Small businesses and self-employed individuals should use Form 3800 to claim any relevant tax credits. The limit on tax credits depends on whether you claim business expenses on your personal return or if your company is incorporated. The following are among the tax credits available, but by no means a comprehensive list, making it advisable to contract a tax lawyer to handle your return.
There are tax credits specifically available to small businesses. They include a small employer health insurance premiums credit, the family and medical leave credit, and a credit for small employer pension plan startup costs.
Small businesses can also claim an increased research activities credit, where up to 20% of research-related expenses can be claimed. Employing long-term unemployed people or military veterans entitles the business owner to the Work Opportunity Tax Credit, which amounts to 40% of the first $6,000 paid in wages.