January 27, 2023

Opinions expressed by Entrepreneur contributors are their own.

On Jan. 3, a new Congress meets in Washington, DC, paving the way for potential tax changes that could affect small and medium-sized businesses. With that in mind, it’s important for businesses to adopt certain tax planning strategies and take advantage of tax credits that are about to expire or are being phased out.

The Employee Retention Credit (ERC) is such a credit. Established in 2020 to provide economic relief during the Covid-19 pandemic, the ERC allows companies to claim thousands of dollars in refundable tax credits to offset losses incurred in 2020 and 2021 while continuing to pay employees . Companies with a full or partial closure or a significant drop in gross revenue may qualify.

Many small and medium-sized businesses I know are eligible for two-quarters or more of the credits, which could reach $7,000 per quarter per employee in 2020, with higher limits per employee in 2021. But the time frame for claiming this credit gets shorter. Start planning now.

Businesses have only three years from when they file their quarterly tax returns for 2020 and 2021 to claim the credit. Even if you have previously received money from the Paycheck Protection Program (PPP), you may qualify for the ERC credit, but you will need time to gather all the necessary documentation before filing the required amended return.

Related Article: How to Get the Employee Retention Tax Credit (ERTC) Under the Second Round of Covid Relief

Beware of companies advertising huge ERC payouts that are “too good to be true,” as the IRS noted in a special warning. The agency further warned that “falsely claiming the ERC could result in taxpayers having to repay the credit, along with penalties and interest.”

Know how to find someone to help you if a problem arises. I had a client who signed a contract with a company that promised an ERC credit twice what we expected along with lifetime audit protection, but the company was hesitant about how to handle a future audit and did not mention addresses and telephone numbers. Certainly a red flag and a reminder that taxpayers should never get too greedy.

The importance of tax planning

How many business owners can honestly say that their accountants advise them on tax planning, such as the ERC benefit, rather than just doing their taxes? Are you building a foundation for a tax strategy that generates recurring savings year after year?

Take the initiative and ask your accountant what plans he has to generate savings year after year and what strategies he uses to achieve that.

Don’t make the mistake of asking your accountant just before year-end how you can save on taxes. If you do, you may be advised to buy a vehicle for your business as the cost can be fully amortized using a bonus depreciation. This is not an example of a great, progressive tax strategy. And that specific deduction, by the way, will lose 20% of its value in each of the next four years, starting in 2023. It will be completely eliminated by 2027.

Related article: How to give yourself a tax break

Accountants should have a plethora of strategies to help small and medium businesses and their owners save taxes. For example, ask yours about research and development credits, or credits for hiring veterans and disabled individuals and members of other groups identified by the government as facing employment barriers.

How do you avoid an audit?

It’s more important than ever to use only legal ways to limit your tax liability. Here’s a list of some dos and don’ts:

  • Don’t put your family vacation in your company’s books. If there is a business purpose for a partial business/family trip and that purpose accounts for more than 50% of the trip, document this and deduct your expenses proportionately. Include notes about the purpose of the trip, your itinerary, meeting and conference agendas, who you met, etc. The IRS has stricter record keeping requirements for trip deductions.
  • Keep original receipts, not just credit card statements. Taxpayers often assume that a credit card statement is a receipt. It does not. Your expense items on only a credit card receipt will likely be declined.
  • Get in the habit of documenting all relevant expenses as you incur them; and consider employing an employee or using technology to do so. You must document the business reasons for the claimed deductions, as there are increased documentation requirements for business travel and meals. You probably won’t remember all of these necessary details if the IRS audits you two or three years after an event happened. If you don’t document actual expenses, you’ll need to deduct the IRS-published per diems by city.
  • Do not pay personal expenses through your company. Write yourself a check from the company for a legitimate reason, such as a salary, wage, or benefit. Then pay personal bills for your mortgage and electricity bill your checkbook, not the company’s.

Related article: The IRS hates telling business owners about taxes.

The messages trickle in slowly. So far, four clients have told me that they have completely overhauled their internal processes to include better records. They spend the time doing this now because they understand it may be riskier in the future.

No one knows what tax changes, if any, are in store, but there are already changes on the books that business owners should be aware of, including benefits that are about to disappear. Act now before it is too late.

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