For many small businesses, the holiday shopping season can represent 20%, 30%, or more of total annual sales. With the season for holiday shopping well underway, be sure to address some key tax issues. Using tax planning strategies now will make sure that you maximize your profits and minimize any problems with the government.
1. Onboard your extra staff
If you need additional help to best serve your customers during the holiday season, make sure you treat seasonal workers correctly. Even though they’ll work for you for a short time, they are likely employees and not independent contractors. Whether they are full-time or part-time, these seasonal employees must complete the same forms you use for long-term, full-time employees. These forms include:
- , to verify they are eligible to work in the U.S.
- , to know how much federal (and state, where appropriate) income tax to withhold.
- , to submit to your state workforce agency so you know whether you’re eligible for a work opportunity tax credit (in case you’ve hired someone who’s been unemployed for at least 26 weeks).
2. Understand how to treat income from gift card sales
Many businesses — restaurants, retailers, and service providers (e.g., hair and nail salons) — sell a considerable number of gift cards or gift certificates during the holiday season. Individuals receiving these items as gifts typically redeem them in the new year.
Usually, you report the income from the sale of the gift card at the time of the sale, but be sure to carefully track sales from gift card redemptions so you don’t report income twice.
Larger businesses that use the accrual method of accounting and have an Applicable Financial Statement (meaning an audited financial statement) have the option to defer income from the sale of gift cards for one year.
What happens if you sell gift cards that are never redeemed? Your state may require you to treat this as unclaimed property that escheats to the state (meaning the property is turned over to the state). If so, this may cost you revenue and produce a tax loss. Check with your on its rules for abandoned and unclaimed property.
3. Check your sales tax procedures
As a merchant, you’re familiar with the sales tax rules in your location. But if you sell to customers in another state, you may be required to collect sales tax and remit it on those remote transactions. There are more than in the U.S., although there are five states with no sales tax.
Find out whether there are any sales tax obligations where your customers are located and whether you qualify for a “small seller” exception to exempt you from such obligations. Find out more about sales tax on remote transactions from .
4. Decide what you’ll do with unsold inventory
If you’re a savvy business owner, you’re skilled in knowing how much inventory to have on hand to meet customer demand during the holiday season. But no matter how expert you are at this, you can never be sure about what will happen. As the clock winds down to the holiday season, you may resort to sales as a way to move your inventory.
Once the holiday season has ended, decide how to dispose of any unsold inventory if you can’t sell it at normal sale prices to customers. The method you choose dictates the tax consequences. You can:
- Liquidate it: If you sell items to a remainder (a company that buys unsold inventory), report the income as you would for any other sale. Yes, you’ll get less than if you could have sold it to customers, but something may be better than nothing.
- Donate it: If you give merchandise to an IRS-approved, tax-exempt organization, you can deduct the smaller of its fair market value on the date of the charitable contribution or its basis (what’s included in your opening inventory). But you must remove the amount of the charitable contribution deduction from your opening inventory since it isn’t part of the cost of goods sold. If the cost of the item wasn’t in your opening inventory (e.g., you treated it as non-incidental materials and supplies that you already deducted), the basis is zero, and no charitable contribution deduction is allowed. Find more information about deducting charitable contributions (including special rules for donations of food inventory) in.
- Take a write-down: If the items are unsalable at normal prices or unusable in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, you may take a write-down affecting the cost of goods sold. This means adjusting the price you carry on your books (assuming you otherwise use the lower of cost or market value for your inventory). But you need to establish the new price by offering the items for sale at the reduced price for a period ending not later than 30 days after the inventory date (the date last counted).
5. Adjust your final installment of estimated taxes
Did the holiday season live up to your expectations? Were sales disappointing? Your holiday activities may impact what you pay in the final installment of estimated taxes due:
- Dec. 31, 2020, for calendar year C corporations
- Jan. 15, 2021, for owners of pass-through entities (partnerships, S corporations)
Make sure the estimated taxes are sufficient to avoid underpayment penalties. But don’t overpay, which amounts to an interest-free loan to the government that you won’t recoup until you file your return. Learn more about estimated taxes in .
A final thought
Don’t let the holiday season pass you by. Talk with your CPA or other tax advisor to make sure you’re handling your small business taxes correctly and optimizing your tax picture for the year.