How to Plan Taxes for Your IT Firm in 2021
Are you looking for ways to use your resources in developing your IT firm rather than only paying taxes? Fortunately, you can do so with proper tax planning. It allows you to invest in the latest technology or develop your employees’ skills while reducing your tax liability.
It takes time to create a profitable plan that can maximize your firm’s value. You can also seek the assistance of reliable tax services to come up with an effective tax plan. Read on to know how to plan taxes for your IT firm in 2021.
Analyze Income
In the United States of America, the tax on the profits of resident corporations stands at 21%. It is recommended not to push analyzing your income to a later part of the year.
Ask yourself the below questions to determine the right time to analyze your income:
- Is your income low enough that it will lose deductions?
- Will the deduction carry over towards the following year?
- What are the predictions of the tax rates of the following year?
Accordingly, you may choose if you wish to use your deductions by accelerating your IT firm’s income. Take into consideration the tax rates for next year as well. You can establish a plan to accelerate the income in 2021 to avoid higher tax rates in 2022.
Consider R&D Deductions and Credits
If your IT firm offers SaaS (Software as a Service), semiconductors, or any other robust technology, you require investment in research and development (R&D). The US government offers significant tax deductions for encouraging such innovation.
You can offset a few R&D-related expenses with the tax credit of R&D. Identify the factors that qualify for this tax credit. Generally, these include investment in supplies, consultants, and labor for R&D projects.
R&D credits are valuable planning tools for your taxes. You have to pass the test of the Internal Revenue Service to qualify as one of the R&D projects.
Use Depreciation
Depreciation allocates the cost of physical and tangible assets over their life expectancy or valuable life. It allows you to know how much of your asset’s value you used. For your assets whose life is beyond a year, you may depreciate its cost over the years.
You can use a Modified Accelerated Cost Recovery System (MACRS) for higher deductions within the asset’s early years. You can hire efficient tax services to plan the methods to maximize your depreciation deductions.
An alternative option is selecting Section 179 of expensing. It allows your firm to deduct the costs of buying used or new assets. These can be your IT firm’s software, furniture, and equipment.
You may also evaluate bonus depreciation. It allows you to deduct most costs from your IT firm’s taxable income.
Consider Switching to A Different Tax Structure
While establishing your business, you decide your operation structure. It may be a partnership, sole proprietor, a Limited Liability Company (LLC), or an S or C corporation. However, you need to re-evaluate if your business structure is still applicable and beneficial according to the tax perspective.
If you find that it fails to meet the standards you desire, you can switch to a different tax structure. You may consider shifting into the C corporation. It allows you to enjoy significant tax deductions and savings.
However, it would be best if you consider other factors before making the switch. Evaluate if the potential tax savings are a reasonable and profitable trade-off. It is recommended to consult a tax professional to know the accurate figures and analyze the cost benefits with and without the shift.
Identify Advantages in the Tax Reform
The Tax Cuts and Jobs Act (TCJA) of 2017 established a Qualified Business Income Deduction (QBI). It allows pass-through business owners a significant deduction. You can receive a deduction of about 20% of your IT firm’s income.
However, QBI imposes several limitations and rules. If your IT firm’s income is too high, you may lose many deductions. Specified Service Trades or Businesses (SSTB) face lower QBI deductions over specific time slots.
Most IT firms are not part of SSTB. But a taxable income over the upper limits gives you a claim of limited deductions alone. The limits include:
- 50% of your IT firm’s share of business wages, or
- 25% of such wages in addition to 2.5% of the firm’s qualified property.
It may be challenging to calculate QBI on your own. Moreover, you require a proper strategy to claim the correct deductions. You can utilize professional tax services to figure out your IT firm’s QBI eligibility.
Planning your taxes is a crucial step for all IT firms. It is essential to start planning at the earliest. Accordingly, you can strategize your firm’s expenses and income. Make sure to identify any profitable deductions and work towards them.