Three Things Small Business Owners Should Be Discussing with Their CPAs Right Now

Date March 14, 2022
Authors Peter Roupas

Contributing Authors: Peter Roupas, CPA, JD, Amelia Mateer, CPA, Josh Masters,CPA, Nabat Mammedova, CPA, Joyce Gebrosky, and Mary Manolakos

If you’re a small business owner and haven’t yet filed your 2021 business tax return, you’re likely talking to your CPA right now. With the deadline looming, you might be in a hurry to complete your return and put taxes behind you, so you can focus on other more pressing business matters. But don’t rush. There are several things to discuss with your CPA before you finalize your return, including some changes in the tax law resulting from the COVID pandemic that could generate substantial savings for you and your business.

Here are three issues that as a small business owner you’ll want to discuss with your CPA:

Employee Retention Credit

The Employee Retention Credit (ERC) is incredibly generous and broad. It can yield a cash refund of up to $7,000 per employee, per quarter. To qualify, your business must have experienced a 20% decrease in revenue in any quarter compared to that same quarter in 2019 (i.e. to pre-COVID levels). For most businesses, the credit expired after quarter three.

Some small business owners, in particular sole proprietors organized as single member LLCs, are overlooking the ERC. Remember, you need only one employee other than yourself to qualify for the credit. Assume, for example, your business has one employee, an administrative assistant and bookkeeper, whose salary for the year is $40,000. You could potentially receive a credit of $7,000 per quarter for quarters one, two, and three. That’s a total credit of $21,000, a significant cash inflow for a small business owner. For businesses with more than one employee, multiply that credit by your number of employees, and you can understand the magnitude of this generous credit.

If you’re a start-up business, and don’t have 2019 revenues, that doesn’t preclude you from taking the credit. Talk to your CPA to determine if your business qualifies as a Recovery Startup Business.

Many businesses, particularly those with 2021 annual revenues that were similar to pre-COVID levels, are surprised to discover that they qualify for the credit. Remember, if your sales dipped by 20% in a particular quarter compared to 2019, you may qualify. Hence, businesses who experience inconsistent revenues from quarter to quarter during the year should be extra mindful to perform those sales comparisons to 2019!

If you qualify for the ERC, your 2021 tax return will be impacted, as the expenses related to the credit are not deductible, which means an increase in taxable income. So be sure to factor this spike when tax planning with your CPA.

Business Meals

New and more generous tax deductions are available for 2021 food and beverage expenses. The rules—some of the changes are considered temporary by the IRS—include:

  • Meals are 100 percent deductible if purchased from a restaurant between December 31, 2020, and January 1, 2023. The IRS defines a restaurant for purposes of this provision as a business that prepares and sells food or beverages for immediate consumption. The definition does not extend to businesses that primarily sell pre-packaged food or beverages not specifically for immediate consumption, like grocery stores; beer, wine, and liquor stores; and vending machines. Nor is an eating facility located on the business’s premises considered a restaurant, even if it’s operated by a third-party.
  • The 50 percent deduction limitation still applies to food and beverage purchases made at non-restaurants.
  • Entertainment expenses remain non-deductible. However, food and beverages purchased at an entertainment event can be deducted if stated separately from the entertainment costs. They can be on a separate bill or listed as separate line items on the bill.

To ensure you maximize your food and beverage deductions, be sure to discuss those expenses with your CPA.

Retirement Plan Options

Tax time is always an appropriate time to discuss your retirement plan funding options with your CPA, as you have until the filing deadline, including extensions, to make your contribution. Have your CPA run different scenarios to determine the appropriate amount to contribute. And if you need more time to determine your contribution for 2021, consider filing an extension.

If you don’t currently have a retirement plan, setting one up now can yield a tax deduction for 2021. And if you have a retirement plan, consider upgrading to another plan, particularly if your earnings for the year increased over previous years, or if you anticipate increases in your future earnings.

Business owners have several plans to choose from, each with its set of rules and requirements:

Traditional IRA:

  • Must have earned income
  • Maximum annual contribution amount: $6,000 (an additional $1,000 for ages 50 and older), or amount of earned income if less than $6,000
  • Contribution deadline: April 18, 2022 for 2021 contributions
  • Advantages: contributions are generally tax-deductible; earnings are tax-deferred until withdrawn
  • Self-Employed IRA (SEP):

  • Must have self-employment income
  • Maximum annual contribution amount: 20 percent of net self-employment income after self-employment tax deduction, up to a maximum of $58,000
  • Contribution deadline: due date of return, including extensions
  • Advantages: easy to set up and maintain; allows you to choose how funds are invested; you are immediately 100 percent vested; no reporting requirements; does not require recurring contributions

  • For employers with fewer than 100 employees
  • Eligible employees must have earned at least $5,000 in any two prior years and are expected to earn at least that much in the current year
  • Employee can elect to defer up to $13,500 (an additional $3,000 for ages 50 and older)
  • Employer can either match employee deferral dollar for dollar up to 3 percent of the employee’s wages, or contribute 2 percent of wages, up to $290,000, for all employees
  • Advantages: higher contribution limits than a SEP; not as complicated as a 401k
  • 401(k):

  • Any employer can set up a 401(k) plan
  • Eligible employees can elect to defer up to $19,500 (an additional $6,500 for ages 50 and older)
  • Advantages: the maximum deduction for employer and employee; employers allowed to match employee contributions; employee is generally fully vested sooner; plan is managed by professionals; easy for employees to contribute, usually through payroll deductions
  • So before you finalize your business return this season, be sure to pause and consider whether you’ve fully vetted the above considerations. The tax savings could be significant.

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