Cut Your Business’s Tax Bill With These Provisions
As tax filing season officially gets underway, here are several new business-related tax provisions that could help cut your tax bill. The three provisions outlined in this article can also be applied retroactively.
- Net Operating Losses (NOL). When your company’s tax deductions exceed taxable income, the result is an NOL. Tax changes now allow your company to carry back an NOL incurred from 2018 through 2020 for up to five years to offset taxable income. This is a welcome change as 2020 has had a dramatic impact on many business’s bottom line. Businesses can now reclaim some of the income taxes they paid in prior years by using an NOL.
What you need to do. Consider whether amending prior years’ tax returns is the right decision for you in order to get a refund of prior taxes paid.
- Qualified Improvement Property. Certain business assets known as qualified improvement property (QIP) can now be immediately depreciated upon being placed in service. QIP is defined by the IRS as any improvement made to an interior portion of a building that is nonresidential real property. This tax benefit will last for at least three more years before being scheduled to phase out.
What you need to do. Look through your fixed asset detail and determine if you have QIP that was placed in service in 2020. These assets would qualify for 100% expensing in 2020. If you have QIP that was placed in service in 2019 or 2018, you have the option of filing an amended return and treating those assets as eligible for 100% expensing.
- Excess business losses. The rule disallowing business losses exceeding $250,000 ($500,000 for married filing jointly couples) for business owners and partners on their individual tax returns is suspended for tax years 2018 through 2020.
What you need to do. If you incurred an excess business loss in 2020, be sure to include the loss on your 2020 tax return. If you incurred excess business losses in 2018 and/or 2019, consider amending your tax return for either or both of these years to remove the excess loss limitation.
Do Best Friends Make Best Business Partners?
Going into business with a friend can work – sometimes
Childhood buddies Ben Cohen and Jerry Greenfield came from humble beginnings. They invested in a $5 correspondence course in ice cream making from Penn State University and $12,000 in cash and opened their first ice cream shop in a renovated gas station in Burlington, Vermont in 1978.
Twenty-two years later they sold their company, Ben and Jerry’s Homemade, to multinational food giant Unilever for $326 million.
Ben and Jerry proved that friends can be successful business partners and build a wildly successful business that boasts a worldwide brand.
But for every Ben and Jerry success story about friends going into business together, there are stories where the opposite occurred with the business going belly-up.
As John D. Rockefeller opined, “A friendship founded on business is a good deal better than a business founded on friendship.”
Here are several questions to consider before asking a friend to join your new venture.
- What will my friend bring to the business? Does he or she have strengths that will clearly enhance the business—abilities, knowledge or resources you lack or aren’t willing to acquire elsewhere? Say, for example, you’re a topnotch salesman but dislike finances and record keeping. If your friend loves details and thrives on spreadsheets, the partnership may work. If, on the other hand, your pal can’t offer something that would round out the company or make it more profitable, consider partnering with someone else.
- Are we in agreement? To make any business succeed, you and your friend will be working together day after day. Such relationships bring out the best—and worst—in people. Resentment can fester when partners feel that workloads and rewards aren’t fairly distributed. So it’s crucial to discuss expected work hours, contributions, roles and responsibilities. Be sure to document your mutual understanding in a well-crafted business plan and partnership contract. Specify ownership breakdown, investment amounts, conflict resolution protocols, and succession plans.
- Can we communicate effectively? Like a good marriage, a long-term business partnership requires honest communication to succeed. Ask yourself whether you can handle constructive criticism from your friend/business partner. Even the closest business associates don’t see eye to eye on every issue. Take a straightforward look at how you both handle disagreements. Will you work through difficulties for the firm’s sake, or bury your head in the sand and hope for the best?
- What’s most important, our friendship or the business? Developing a profitable business is hard and often unrewarding work. Going into business together may strengthen your connection, but don’t overlook the possibility that your friendship may be damaged in the inevitable struggles of running a company. Remove blinders. Assess risks. Agree on priorities from the start.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.