If you’re a small business owner, there are ways to find new savings and deductions for the rest of 2020.
As 2020 progresses, owners of small and medium-sized businesses are planning for the future and looking for ways to leverage tax cuts and incentives to grow and expand. If you’re a business owner, there are some new ways to save that are popping up for 2020. If you missed any of the tax incentives from last year, it might not be too late to use them, as well.
Changes to the tax code from the Tax Cuts and Jobs Act (TCJA) in 2018 meant major reductions in taxes for many SMBs. Companies quickly adjusted to lower corporate tax rates and pass-through rate savings for individual and sole proprietorships.
For 2020, few new tax breaks are on the horizon after the TCJA’s sweeping updates, but there are still some ways small business owners can find new savings and deductions for the coming year.
1. Safe Harbor for Rental Income
Last year the TCJA offered sole proprietors, partnerships, and some trusts and S corporations a qualified business income (QBI) deduction of 20%. In September of 2019, the IRS issued a new rule that allows rental real estate enterprises the ability to qualify for the 20% QBI as well. Their new “safe harbor” guidance allows rental real estate enterprises to be treated as a trade or business for purposes of the deduction under section 199A.
2. Temporary first-year bonus depreciation
Under the TCJA, businesses that invest in qualified property used for business purposes are allowed to claim a first-year bonus depreciation of 100% for property purchased any time during the year and put into service. The 100% bonus was originally intended to stay in effect through 2023, but a recent update extends portions of it through 2027. For SMBs looking to add or update equipment, machinery, or even software, this depreciation can offset the cost along with keeping you competitive in the market.
3. Green vehicle incentives
If you’re looking to add vehicles this year, consider buying a plug-in electric car or a vehicle that runs on natural gas. An IRS tax credit between $2,500 to $7,500 may apply for any new electric vehicle purchased, depending on the size of the vehicle and its battery capacity.
4. Healthcare tax credits
For businesses with fewer than 25 full-time or full-time equivalent employees, a small business healthcare tax credit could save 50% of the cost of providing coverage for yourself and your staffers. If you pay at least half of the monthly premium for coverage under a Small Business Health Options Program (SHOP) plan, you may be eligible for a credit of up to half the employer contribution.
For businesses with fewer than 25 full-time or full-time equivalent employees, a small business healthcare tax credit could save 50% of the cost of providing coverage for yourself and your staffers.
To qualify, employees must average $50,000 per year or less in salary and work at least 120 days of the year. You need only provide coverage for the employee, not their dependents, under a SHOP plan to qualify for the credit. The credit is highest for companies with less than 10 employees who average $25,000 or less for their annual salary. The smaller the business, the higher the credit amount.
Some small businesses offer to split the cost of healthcare premiums with employees to get them enrolled and covered. If your company does so, you could recoup some or all of your costs with these tax credits.
5. Increased allowances for 401(k) contributions
For 2020, the IRS has raised the employee contribution limit for 401(k), 403(b) and the majority of 457 plans to $19,500 — an increase of $500 over last year. For employees and business owners over 50 years of age, another $6,500 is allowed.
Why should that matter for small/medium businesses? Because every dollar an employee saved through your company retirement plan is tax-exempt, lowering your company’s FICA contribution costs.
Retirement plan credit
Don’t have a 401(k) plan in place? The Credit for Small Employer Pension Plan Startup Costs can help offset the expense of setting up, administering, and educating employees about a new plan. If you have less than 100 employees and haven’t offered a retirement plan in the past, you could receive a credit for half the startup costs — up to $500 a year for the next 3 years, which comes out to a total of $1,500.
That’s good news — even for sole proprietorships — when it comes to saving for the future.
6. Increased allowances for HSAs
For employees or owners who choose a high-deductible health plan, the amount eligible to put into an HSA, or health savings account, has increased to $3,550 for individual coverage and $7,100 for family plans. Again, these savings are tax-exempt, allowing businesses to save on employer FICA contributions.
For SMBs, leveraging the tax codes to your advantage can provide opportunities to grow your business and help you and your staff plan for retirement. Work with your tax professional to access and recover as many tax incentives as possible for the coming year.