As 2021 draws to a close, it’s important to determine what tax planning strategies make the most sense for you and your business. Review these key year-end tax planning considerations and keep in mind that they may be impacted by a tax law change prior to the end of this year.
- Employee Retention Credit – Employers may claim a refundable credit against Medicare tax for wages paid during the coronavirus crisis if (1) business operations were suspended due to a COVID-19 related shut-down order, or (2) gross receipts declined by more than 20% as compared to the same quarter in the prior year. For eligible employers with <500 full-time employees, all wages qualify. For eligible employers with >500 full-time employees, only wages paid to employees when they are not providing services due to COVID-19 qualify. The credit applies to the first $10,000 of qualified wages per employee for any calendar quarter between June 30, 2021, and January 1, 2022.
- Meals and Expense Deduction Limit – For 2021 and 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants if the expense is “ordinary and necessary”.
- Excess Business Losses – Non-corporate taxpayers can deduct a net trade or business loss up to a maximum of $262,000 ($524,000 for joint returns in 2021). Any excess loss becomes an NOL and is carried forward to future tax years.
- Research and Development Credit – For tax years beginning after December 31, 2021, research and development costs must be capitalized and amortized. Research and development costs incurred in the U.S. will have an amortization period of five years, while those costs incurred outside the U.S. will have an amortization period of 15 years. This tax treatment is different from the way businesses currently account for these costs, as businesses can either deduct these costs or choose to capitalize and amortize these costs. This is a key area that many anticipate may change as a result of the pending tax legislation.
- Business Interest Expense Limitation (163j) – The passage of the Tax Cuts and Jobs Act applicable for tax years beginning after December 31, 2017, created a new provision related to business interest expense . For each tax year, businesses are required to compute their adjusted taxable income to determine their eligibility to deduct business interest expense paid during the year. The deductible business interest expense was limited to 30 percent of the computed adjusted taxable income, and the computation for adjusted taxable income included an addback for depreciation, depletion, and amortization. For tax years beginning after December 31, 2021, the addback for depreciation, depletion, and amortization will no longer be included in the computation of adjusted taxable income. This change in the computation of adjusted taxable income may result in businesses having more interest expense limited for tax purposes. The interest expense is carried forward to the extent it is limited.
- Net Operating Losses (NOLs) – NOLs that were generated in a taxable year beginning after 12/31/20 are once again limited to 80% of taxable income. This limitation was temporarily suspended under the CARES Act for NOL’s generated through 2020. Taxable income for this purpose is determined without regard to the NOL deduction, QBID, and Section 250 deduction over the total NOL deduction from NOLs arising in taxable years beginning before 1/1/18.
- Charitable Donations – The CARES Act included a provision allowing those individuals who are not able to itemize their deductions to take a deduction for charitable in arriving at taxable income. The maximum deduction was $300 and was required to be a cash donation made to a qualified organization. This provision was extended to 2021 with one important enhancement, for 2021, married couples filing jointly may deduct up to $600. Additionally, the CARES Act allows for itemizing taxpayers to elect to deduct up to 100% of adjusted gross income (AGI) via charitable donations paid in cash to qualified organizations during 2021 .
- Net Operating Losses (NOLs) – Similar to corporations, NOLs arising in tax years beginning in 2021 or later may not be carried back and must be carried forward indefinitely. The NOL deduction is limited to 80% of taxable income without regard to the allowable NOL deduction.
- Child Tax Credit – The American Rescue Plan included the expansion of the child tax credit for the 2021 tax year. The credit rose from $2,000 to $3,000 for children up to 17 years old – but to $3,600 for children 5 years old and younger. Half of the 2021 credit amount is being paid in advance beginning in July 15 and will end on December 15. The remainder of the credit will need to be claimed on the 2021 tax return. Taxpayers will need to reconcile the monthly payments received with the amount they are entitled to claim when filing the 2021 tax return. This amount can be calculated using the 2021 Child Tax Credit Calculator.
- Required Minimum Distributions (RMD) – RMD are back for 2021. Individuals older than 72 years old by the end of the year are required to take an RMD for 2021. Contributions limits remain the same for 2021. Income ceilings and deduction phaseouts have increased slightly.
As mentioned above, both businesses and individuals should keep in mind that the legislature still intends to pass significant tax law changes prior to the end of 2021 which could alter some of the provisions reviewed above. We are available to help you determine the best tax planning approach. Contact us today for additional information. We look forward to speaking with you soon.