Big Tax Breaks for Small Businesses

Reduce your tax obligation by taking advantage of the many small business tax breaks now available because of tax code changes.

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Sandra Beckwith

Sandra Beckwith has been writing for traditional and online publications since she sold her first magazine article while still a journalism student. Her articles in business, consumer, trade, and custom magazines; in corporate, alumni, and nonprofit organization publications; and on websites and blogs help readers learn more about successful initiatives and interesting people, or about how to do something better, faster, or smarter.The author of three traditionally published nonfiction books and a past contributing editor of three trade journals, Beckwith writes frequently on small business, logistics, supply chain, and work-life balance topics.She is also a national and regional award-winning former publicist who teaches authors how to market their books. Her book marketing website, BuildBookBuzz.com, has been recognized for excellence by four organizations and is ranked in the top 10 globally for book marketing blogs. She has served on the board of directors of the American Society of Journalists and Authors, where she remains an active volunteer and member. She is also a member of the Association of Ghostwriters. Beckwith is a graduate of Utica College of Syracuse University, a past member of its Raymond Simon Institute board, and a recipient of its Outstanding Public Relations/Journalism Alumna Award. A resident of a sweet little Erie Canal village in Western New York, Beckwith listens to audiobooks every evening while walking along the canal's original towpath for exercise. Her hobbies include eating, sleeping, and spending time with friends and family—but not necessarily in that order.

Qualified business income pass-through dDeduction

As part of the TCJA, lawmakers created the Qualified Business Income Deduction to match the act's corporate tax rate reduction from 35% to 21%. It gives "pass-through" organizations—sole proprietorships, S corporations, and partnerships—a 20% deduction on qualified income.

"While it seems straightforward, this is a complex calculation and has many nuances," says Alton Moore, a CPA, tax attorney, and founder of Evolution Tax and Legal.

He notes that, in addition to the deduction that's calculated in one of three ways, the deduction doesn't apply to the following business categories:

Accounting
Actuarial science
Athletics
Brokerage services
Consulting
Financial services
Health services, such as those performed by doctors and nurses
Investing and investment management
Law, including lawyers
Performing arts
Trading
Any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners
Services you performed as an employee of another person or business

Depreciate business assets 100% in first year

"Small business owners that purchase new equipment, computers, and cars can use bonus depreciation instead of spreading the cost over a number of years," says Yvette D. Best, a tax accountant and owner of Best Services Unlimited LLC.

The TCJA increased the amount of "bonus depreciation," also known as the "first year depreciation deduction," for allowed purchases from 50% to 100%.

Employee retention credit

Businesses that continued to pay employees while they were closed due to the pandemic, that reduced hours because of local restrictions, or that have gross receipts that are 50% less in a 2020 quarter compared to the same quarter in 2019 because of COVID-19, are eligible for a $5,000 credit per paid employee.

"This will offset the employer's 6.2% share of Social Security taxes, with the excess being refundable," says Jacob Dayan, CEO and co-founder of Community Tax. "This is a potentially great tax break for those who have been heavily impacted by the pandemic, while also keeping people employed."

Family and medical leave tax credit

According to the Internal Revenue Service, the Families First Coronavirus Response Act "provides businesses with tax credits to cover certain costs of providing employees with required paid sick leave and expanded family and medical leave for reasons related to COVID-19, from April 1, 2020, through December 31, 2020."

Best adds that "eligible self-employed individuals are also entitled to claim an income tax credit for qualified sick and family leave."

To be eligible as a self-employed person, she says, you must be:

Conducting a trade or business as a self-employed individual, and
Eligible to receive paid sick leave under the Emergency Paid Sick Leave Act if you were an employee of an employer (other than yourself), and/or
Eligible to receive paid family leave under the Emergency Family and Medical Leave Expansion Act if you were an employee of an employer (other than yourself).

Employee retirement plan tax credit

The SECURE Act, passed in December 2019, increases the amount of tax credits provided to small businesses that want to offer retirement plans to themselves and their employees.

Employers with up to 100 employees are now eligible for an annual tax credit equal to 50% of the costs to set up and administer a retirement plan and educate employees about it. The credit applies for three years.

"A small employer can receive a tax credit of up to $5,000 for three years for starting a new qualified retirement plan," says Brian Halbert, vice president of retirement services at WD Pensionmark. The previous amount was $500 per year for three years.

Those businesses also qualify for an additional tax credit of up to $500 per year for three years when they include automatic enrollment into the qualified employer retirement plan.

Consult a professional

To make sure you're taking advantage of all available tax breaks, credits, and deductions, talk to a tax attorney, accountant, or enrolled agent. And remember, professional service fees are deductible.