Hey New Businesses, Don't Overlook These Tax Breaks!
In large part due to unstable employment situations caused by the COVID-19 pandemic, millions of new businesses have been created in the last twelve to eighteen months. If you are one of these, filing taxes for a business may be new to you. Most people understand that a business can deduct normal day-to-day operating expenses from its income. But some tax breaks are not so well known. Be sure you don't overlook these valuable tax breaks that can help get or keep your business on solid footing:
- If you incurred startup costs and/or organization costs in getting your business going this year, you may be able to immediately deduct up to $5,000 in startup costs AND $5,000 in organization costs, if the total of such costs doesn't exceed $50,000. Further, if more than $5,000 of such costs are incurred, you can elect to amortize (i.e., expense) the excess over a fifteen-year period of time.
Startup costs are those incurred to investigate the potential of creating or acquiring an active business and costs to actually create one. To qualify as startup costs, the costs must be ones that could be deducted as business expenses if incurred by an existing active business and must be incurred before the active business begins.
Organization costs are costs incurred in forming a partnership, LLC or corporation, including the legal fees for drafting a partnership agreement or corporate charter and bylaws, necessary accounting services in forming the entity, filing fees, and costs of organizational meetings of stockholders and directors.
These expense elections are often overlooked but are extremely important. If these elections are NOT made, the costs are treated as nondeductible capital expenses.
- New businesses typically acquire fixed assets, such as equipment, furniture, computers and vehicles. Current federal law allows most businesses to immediately deduct the cost of these assets in full through the use of what is called bonus depreciation as well as the Section 179 deduction
- It's never too early to start thinking of retirement planning. Contributions to tax-favored retirement plans can yield generous deductions. To encourage you to get started, federal tax law allows you to take a credit for some of the startup costs involved in setting up a plan. The credit is equal to 50% of the costs for setting up a SEP, SIMPLE or qualified plan such as a 401(k) plan. The maximum credit is limited to the greater of $500 or the lesser of $250 per eligible employee and $5,000.
- Some businesses may qualify for what is called the research and development (R&D) Credit. If your business designs new processes or products or improves existing ones, you may qualify for the R&D credit. The federal R&D credit is dollar for dollar of qualifying costs, and many states also offer state R&D credits.
- In addition to the above credit, there are numerous other credits that fall under the overall umbrella of the General Business Credit. These tend to be lesser-known and not as commonly used, but are worthy of mention. This includes related to qualified electric vehicles, sustainable energy, and employment in certain low-income or otherwise disadvantaged areas.
Just because you may be a rookie in business doesn't mean you have to file your business taxes like one. Taking advantage of these tax breaks is a smart veteran move that greatly contributes to the health of your new business.
Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants (www.egpcpas.com), a full-service financial firm with offices around Arkansas, and winner of The Sun-Times Reader's Choice Award for Best Accountant