2021 Year-End Planning for Businesses
2021 Year-End Planning for Businesses
As we approach the end of another year, it is important to take some time to think of planning moves that may help lower your income tax costs this year.
Major changes in tax laws for businesses from the CARES Act (March 2020) and subsequent stimulus focused legislation (i.e. ARPA March 2021) have provided for tax free grants, credits on employment taxes, and low interest federal guaranteed loans. Additionally, the President signed the Infrastructure Investment and Jobs Act commonly referred to as the Bipartisan Infrastructure bill containing several tax provisions impacting certain industries.
Below we have compiled a list of items that may be helpful if taken into account before the end of the year. Not all will apply to you but many may. We recommend that you contact us to discuss the benefit and your eligibility before taking action to save or defer taxes.
- Defer Income and Accelerate Deductions. The standard of deferring income into a subsequent year while concurrently accelerating deductions to defer income tax costs will continue to provide quantifiable benefits that can be accomplished quickly. WARNING deferring income tax costs into a subsequent year does not always result in lower tax costs and may in fact increase your tax bill if the rates of taxation are higher in the subsequent year(s). Careful evaluation may be needed especially for those who anticipate higher income or tax rates in the future.
- Employer Retention Credits. Although the Infrastructure Investment and Jobs Act ended the ERC tax credit program effective 9/30/2021, you may still benefit from a review of your eligibility for the credit and preparation of amended employment tax returns to recover employment tax costs already paid.
- Expenditures for capital investments: Businesses considering further investment into capital and operational assets in the coming year can benefit from completing the purchase and placing the property in service before year end to qualify for a first year 100% write off (168k bonus depreciation on new or used property). Additionally, first year accelerated expensing (179 depreciation) thresholds have been increased to $1,050,000 annually, phasing out at $2,620,000 in total assets placed in service in 2021. Certain automobiles, leasehold improvements, and other types of capital investments may not be eligible property under either code section. Careful consideration is required.
- Retirement contributions and new plan credits: Consider your ability to fund and to what level you can accrue future contributions to retirement accounts that qualify for a business deduction this year. If you haven’t done so already, consider establishing a retirement plan (401k, SEP IRA, Defined Benefit, etc). Certain income tax credits for the establishment of new plans with automatic employee enrollment provisions can be helpful in offsetting the implementation. Consideration must be given to which plans may best suit your needs, the needs of the organization, and its employee(s).
- Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. In general, your ability to deduct losses from a partnership or S corporation is limited to your basis in your investment, including certain loans you have made or have guaranteed. If you anticipate losses in the current year, you may consider contributing cash or other assets or making a loan to your company to increase your basis sufficiently to deduct a business loss.
- 20% Qualified Business Income deduction. Individuals who are partners in a partnership or shareholders in an S Corporation, sole proprietors and, in some instances, rental activities may qualify for a deduction of 20% of their pass-through income. The “Qualified Business Income (QBI)” deduction is subject to many limitations including the type of business, wages paid by the business, basis of your property assets, and total taxable income. However, most taxpayers with taxable income below $164,900 (single) and $329,800 (married filing joint) will not be subject to these limitations and will qualify for the deduction. Careful planning and analysis is needed to maximize this deduction especially for those individuals with annual income at or above the income thresholds.
- Remain an Eligible Small Business Taxpayer. In general, entities with annual gross receipts less than $26,000,000 will be eligible for simplified accounting rules (cash method of account, no limitation on business interest expenses, and others). If revenues are near or reaching this amount, consideration may be needed to evaluate how the applicable tax provisions may impact tax cost, and opportunities to avoid the additional requirements.
Other items to consider – Ask us about:
- Accounting for 100% deductible meals (food or beverages) provided by a restaurant as these costs should be segregated from other meal and entertainment costs previously subject to the 50% deductible limitation, and non-deductible costs.
- Previously suspended passive or basis losses available to offset current year taxable income.
- Use of net operating losses from a current or prior year as 2021 losses will be subject to income limitations and may only be carried forward into future years.
- Benefits to be derived from implementing a change in accounting method such as from the accrual to cash basis of accounting (or vice versa).
- Expensing all eligible property under a de minimis safe harbor election for materials and supplies that are not required to be capitalized in your business. In most small businesses, this is less than $2,500 per unit of property but may vary.
- Consider accrual or payment of year-end bonuses. In order for accrued bonuses to be deductible they must be paid in early 2022.
- Determine the company’s or individual partner’s/shareholder’s need to make estimated tax payments to avoid or minimize underpayment penalties.
- Consider allowances for employment or income tax credits for paid family and medical leave, and the hiring of “disadvantaged workers” (Work Opportunity Credit)