As 2021 is coming to a close, we invite you to make the most of year-end tax planning. Businesses faced a difficult year in 2020, and many are still recovering from it. Federal and state governments have passed several pieces of legislation in response to the pandemic, and it is uncertain whether additional relief is forthcoming. As the coronavirus pandemic continues to impact the economy, it is now more important than ever for businesses to consider the possible opportunities that tax planning presents. Proper planning moves may offer great tax savings this year, and every year going forward.
We have highlighted below tax changes to consider for 2021 year-end tax planning.
Pass-Through Entity Tax Election – Minnesota passed a new elective pass-through entity tax for years beginning after December 31, 2020. Qualifying entities can elect to pay Minnesota state tax based on the owners’ income at the entity level. The owners of the electing entities may then claim a credit on their individual income tax return equal to the amount of their share of the pass-through tax liability. This is a “workaround” to the $10,000 cap on the state and local tax deduction that was put in place under the 2017 Tax Cuts and Jobs Act.
Disaster Loan & Grant Assistance – Paycheck Protection Program (PPP) loans and other disaster loans and grants may be excluded from federal gross income if recipients use the proceeds for specified expenses. However, SBA loan payments and EIDL grants are not excluded from MN taxable income for 2021.
Employee Retention Credit – this refundable payroll tax credit was expanded under both the Consolidated Appropriations Act and American Rescue Plan Act and can now be claimed through December 31, 2021 by eligible employers. Businesses who took a PPP loan and were originally ineligible to claim the credit can retroactively claim the credit for past quarters.
In addition to the above considerations, we have compiled a list of actions based on current tax laws that may help you save tax dollars if you act before year-end. Not all actions will apply to your situation, but you will likely benefit from many of them. During year-end tax planning, we consider each taxpayer’s particular situation and planning goals and can tailor a plan to your specific tax and financial position. In the meantime, please review the “Tax Savings Moves to Consider Before the End of 2021” listed at the end of this email and contact us at your earliest convenience to set up a meeting to review your year-end tax planning position.
Lastly, we would like to remind you of a few important year-end items:
- MN Use Tax reporting – if you purchased a taxable item for use in your business without paying sales tax, you probably owe use tax. Generally, these transactions occur from purchases made over the internet or from an out-of-state vendor. Use tax is required to be reported and paid along with your sales tax filings. If you do not file sales tax reports, then you are required to file the use tax report by Monday, February 7th, 2022.
- Personal Auto Use – if your business has company-provided vehicles that are used for personal purposes as well, the personal usage is taxable income and needs to be included on the year-end W-2 filing. We will be sending out separate letters to clients that had personal auto use in the prior year. If you or any of your employees have personal use of a company-provided vehicle, please provide the necessary information to us or your payroll provider as soon as possible.
- Health Insurance – health insurance paid for S corporation shareholders needs to be included on each shareholder’s W-2. A separate letter will also be sent out for this as well. If your corporation paid health insurance for the shareholder(s), please provide the information to us or your payroll provider as soon as possible.
- Form 1099 reporting – Form 1099’s must be issued to all independent contractors who are not incorporated and have received payments in the calendar year that total $600 or more (this includes LLC’s). Form 1099’s must also be issued to individuals who receive rent payments, awards, prizes, or interest payments in the calendar year that total $600 or more. The 1099’s are due to the recipients and IRS by Monday, January 31st, 2022.
- Wayfair – the U.S. Supreme Court issued an opinion on a landmark sales and use tax case in 2018 that has implications for many online sellers and multi-state business. States continue to update their statutes because of this case, so your business sales tax filing requirements may have changed.
Tax Savings Moves to Consider Before the End of 2021
As future tax rates are never guaranteed, you should review your long-term tax position to determine if accelerating income and/or deferring expenses would provide for the best long-term tax planning strategy.
- Business owners may be entitled to a deduction of up to 20% of their qualified business income. For 2021, if taxable income exceeds $329,800 for MFJ (or $164,900 for single, MFS and HOH), the deduction may be limited if the taxpayer is engaged in certain service-type trades or businesses, by the amount of W-2 wages paid by the trade or business, and/or by the unadjusted basis of qualified property held by the business.
- More “small businesses” are now able to use the cash method of accounting, as opposed to the accrual method. Changing accounting methods to the cash method may allow taxpayers to shift income more easily by holding off billings or accelerating expenses.
- Consider making capital expenditures up to the $1,050,000 of certain new or used business property in the current year (IRS Section 179). The amount starts to phase out when qualified asset purchases exceed $2,620,000. Section 179 is fully deductible for MN tax, in addition to federal.
- Businesses can also claim a 100% bonus first year depreciation deduction for machinery and equipment bought used or new if purchased and placed in service during the 2021 tax year.
- Consider expensing the costs of lower-cost assets and materials and supplies that are under $2,500 for taxpayers with non-audited financials, or $5,000 with audited financials.
- Discuss reporting Medicare insurance premiums paid personally as a business deduction. This needs to be coordinated with year-end payroll filings.
- Consider paying out corporate distributions for C-Corporations to take advantage of the current capital gains tax rates.
- Consider purchasing a new car, truck, or SUV for your business to take advantage of favorable 2021 tax deduction rules.
- Consider increasing basis in your partnership or S-Corporation to make a 2021 loss deduction possible.
- Assure officer W-2 compensation and S-Corporation distributions are “reasonable”.
- Increase withholding to eliminate or reduce estimated tax penalties.
- Ensure you are maximizing your use of fringe benefits and retirement plans including, 401K’s, SIMPLE IRA, health savings accounts, flexible spending accounts and insurance plans.
- Consider employing family members to potentially shift income to lower tax brackets or allow for participation in company fringe benefits.
- Consider taking advantage of the “12 month” rule that allows prepaid business expenses to be deducted when paid, even if by credit card.
- Consider locking in shareholder loans at current low interest rates.
- Consider health insurance coverage for you and/or employees.
We look forward to serving you.
Written By Jaci Lilley, DHA CPAs
Due to IRS rules, we must inform you that this written communication is not intended to be used, and cannot be used, by any taxpayer for the purposes of avoiding penalties under the Internal Revenue Service Code or promoting or recommending to another party any transaction or matter addressed herein.