2021 brought a wave of new tax changes for businesses, and 2022 could bring yet another surge. With the end of year in sight, there’s a window of opportunity in the fourth quarter to make strategic tax planning moves that will reduce the amount of taxes owed come tax time.
Potential tax increases continue to brew on many different levels, including corporate rates, individual rates, and capital gains, among others. This means that it’s important to look for ways to reduce your overall tax burden in anticipation of rate increases. Is your business prepared for what’s to come?
In addition to anticipated tax hikes, outlined below are some key changes resulting from expiring COVID relief legislation, as well as sunsetting provisions coming out of the Tax Cuts and Jobs Act (TCJA).
Pending Tax Increases and Planning Considerations
At this point, we don’t know what tax changes will occur prior to year-end, as we’ve seen widely varying proposals over the last few months.
If you anticipate enactment of tax legislation that is unfavorable to your business, you may be looking for ways to accelerate income into 2021 and defer expenses to 2022, counter to the most traditional year-end approach. This reverse approach could include electing out of 2021 bonus depreciation to defer deductions to later years. You can also focus on accelerating income by faster billings close to year-end. If individual income tax rates increase and the TCJA qualified business deduction is eliminated for your business, you may be looking at entity restructuring to significantly minimize your taxes heading into 2022.
Employee Retention Credit
While this credit opportunity ends with the 2021 third quarter, eligible small businesses that paid qualified wages in 2021 are able to claim a credit of up to $7,000 per employee per quarter on current or amended payroll tax filings, an increase from $5,000 per employee in total for 2020. For example, if a business employs 20 people, it can claim up to a $420,000 credit in 2021 and $100,000 in 2020. Businesses must meet certain eligibility requirements to qualify.
Please keep in mind that a business cannot use the same qualified wages for both the Paycheck Protection Program and the Employee Retention Credit; however, your advisor can help develop strategies to leverage the benefits of each incentive and find ways to enhance the savings of both.
Alternative Minimum Tax Credits
Businesses are eligible for an accelerated recovery of alternative minimum tax credits for tax years 2021 and 2022. The TCJA repealed the corporate AMT in 2017 and allowed corporations to recoup some of the AMT taxes paid prior to the repeal as refundable credits against their current tax liability. The CARES Act then accelerated the ability for companies to recover those credits starting in 2019 and claim a full refund in an effort to increase corporate cash flow during the pandemic.
Net Operating Losses
For tax years 2018 through 2020, the CARES Act suspended the 80 percent net operating loss (NOL) carry forward rule and allowed for these NOLs to be carried back five years. This means that business taxpayers who experienced an excess of deductions over taxable income from business operations in 2021 can carry 80 percent of the excess amount forward indefinitely but cannot carry it back. Exceptions apply to qualified farming losses and NOLs of non-life insurance companies.
Excess Business Loss Limitations
Excess business loss (EBLs) limitations are back for 2021. After being suspended in the CARES Act for tax years 2018, 2019, and 2020, noncorporate taxpayers are now subject to EBL threshold amounts of $262,000 for individuals ($524,000 for joint returns). Any business losses in excess of the taxable year’s deduction convert to NOLs and are eligible to offset income in future tax years.
Research and Development (R&D) Credit
Businesses with research expenditures, such as technology and life sciences companies, will no longer be able to deduct R&D expenses as they occur. The IRS will require business owners to amortize qualifying research expenses or “QREs” over multiple years instead of deducting them in the year incurred unless the provision in the TCJA changes before Dec. 31, 2021.
Through 2021, businesses could deduct Section 174 expenses in the year in which they were incurred or capitalize and amortize the costs over period of time not less than five years. But this new provision eliminates the former option.
Starting in 2022, Section 174 expenses associated with research conducted:
- within the U.S. will be capitalized and amortized over a five-year period.
- outside the U.S. will be capitalized and amortized over a 15-year period.
Charitable Contributions
In an effort to incentivize corporations to heighten their charitable contributions to nonprofits during the pandemic, the CARES Act temporarily increases the deduction limitation for charitable contributions from 10% to 25% of taxable income for 2021.
These changes only relate to cash donations and will not be eligible for stocks, real estate, or other non-cash donations. The increase only applies to public charities and will not pertain to certain private foundations or donor-advised funds.
Meal Deductions
In 2021 and 2022, businesses can claim 100 percent of food and beverage expenses, provided that the meals were paid to restaurants, the business owner or employee is present, and the meal is not considered extravagant. Other entertainment or business meal expenses that fall outside of these guidelines can be deducted at 50 percent. This temporary deduction was created to assist restaurants during the pandemic.
Sick and Family Leave Credit
Small and midsized businesses with less than 500 employees are eligible to claim tax credits related to wages paid for providing paid sick and family leave related to COVID. After March 31, 2021, companies were not required to provide the paid family and sick leave, but if wages were paid voluntarily through September 30, 2021, they are eligible for the same fully refundable tax credits.
Bonus Depreciation
100% bonus depreciation is allowed for qualifying assets (such as machinery, equipment, computers, appliances, and furniture) with a recovery period of 20 years or less if placed in service before Jan. 1, 2023. The TCJA also broadened eligibility to include used property and qualified film, television, and live theatrical productions.
Bonus depreciation is set to be reduced in the subsequent years as follows:
- 80% for 2023
- 60% for 2024
- 40% for 2025
- 20% for 2026
Looking Ahead
The last two years have been filled with policy changes, and next year is no exception. Connect with us so we can help you identify ways the legislation can work for you. Please contact us at (781) 247-5569 if you would like to start on year-end tax planning for your business.
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.