If you are a business owner, these 2021 tax planning tips for businesses will help you prepare for the upcoming tax filing date. There are only a few more months left this year to prepare and perhaps minimize your income tax liability where you can. This information provides a good starting point, especially since some allowances are in place due to the ongoing pandemic.
Employee Retention Credit
You may be eligible for a refundable Medicare tax credit on wages paid during the pandemic if the circumstances meet certain criteria.
Your business qualifies for this credit if:
- operations were impacted by a COVID-19 closure order, or
- the business experienced a 20 percent decline in gross receipts compared to the same quarter the year before
Here’s the catch: The employee retention credit applies to all wages for businesses with less than 500 full-time employees. If your business employs more than 500 full-time employees, the credit only applies to wages paid to employees who couldn’t work due to COVID-19. Note this applies to the first $10,000 of wages paid to eligible employees for quarters June 30, 2021, through January 1, 2022. Discuss additional qualifications and restrictions with your tax advisor.
Treatment of Business Losses
Net operating losses: A net operating loss (NOL) incurred after December 31, 2020, is limited to 80 percent of any taxable income. Per the IRS, this is “…determined without regard to the deduction, QBID, and Section 250 deduction over the total NOLD from NOLs arising in taxable years beginning before January 1, 2018.”
Excess business losses: If you are a non-corporate filer with a net trade or business loss of up to $262,000 (or $524,000 for joint returns) you can deduct this on your taxes. However, a loss that exceeds these ceilings is deemed a net operating loss and is carried forward to future tax years.
Please note that NOLs were afforded some special provisions within the CARES Act in years past. Therefore, it is recommended to seek proper counsel on how to handle losses your business experiences before you file your 2021 taxes.
Deductions for Meals and Expenses
You can deduct 100 percent of your expenses for food and beverages on your 2021 tax return, provided the expense is not considered “lavish or extravagant” by the IRS. Also, the business owner or other representative must be present when food/beverages are provided for the expense to count towards a write off. This benefit applies to 2022, as well.
Business Interest Expense
There are some changes on the horizon here. For the 2021 tax year, your allowed business interest expense deduction is 30 percent of your adjusted taxable income, which involves add-backs for depreciation, depletion, and amortization.
But, after December 31, 2021, for tax years 2022 and beyond, these add-backs are excluded from the calculation for adjusted taxable income—and your business may not get to deduct as much business interest as an expense.
For Our California Clients Who Receive Pass-Through Income
In 2021 (and through 2025) Californians who receive pass-through income are granted a bit of relief thanks to the Small Business Relief Act enacted in California Assembly Bill 150.
Now, there are restrictions, but, if you and your pass-through entity qualify, the benefits are big. As explained in the State of California Franchise Tax Board’s Pass-Through Entity Elective Tax September 2021 newsletter: “This new law allows certain pass-through entities to annually elect to pay an elective tax in the amount of 9.3% of the pro rata share or distributive share of the entity's partners, shareholders, or members. The partners, shareholders and members then receive a tax credit equal to that amount.”
This can be incredibly beneficial for minimizing tax liability in individual returns. Make sure you fully understand implications this law means for yourself and the pass-through entity. There are eligibility requirements for both the pass-through entity and individuals involved in these entities. Consult the proper professionals for guidance on how to properly make this election.
Last Words on 2021 Income Tax Planning for Businesses
Please note this article is written for informational purposes only and should not be considered tax advice. While it’s important to understand the impact any tax changes have on your business, this article provides just a few highlights. There may be additional rules you must comply with, depending on your situation. Your income tax professional can help you determine which changes apply to your business and any steps you can take to offset your tax burden.
Pantheon Wealth Planning and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.