When you’re in business you know that year-end is the time to start thinking about measures you can take to lower your corporate taxes for both this year and next. Tax planning is tough enough, but this year it could be even more than usual due to the uncertainty about legislation pending in Congress, which could have a huge impact on the situation.
Even so, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will pooling deductible expenses this year or next to maximize their tax value .
However, when new laws are passed that include tax increases, the highest income businesses and owners may find that strategies to the contrary are better. In other words, it may make sense to tax income until 2021 to be taxed at current rates and defer deductible expenses until 2022 when they can then be used to offset potentially higher taxed income.
With that caveat, here are some measures that are based on the current situation that could save you taxpayers’ money. Not all will apply to everyone, but likely every company can find a gem on the list.
Taxpayers who are not C-corporations are entitled to a deduction of up to 20 percent of their qualified operating income. For 2021, if taxable income exceeds $ 329,800 for one couple (about half that for others), the deduction may be capped if you are in a service or business (e.g., legal, accounting, healthcare, or consulting) , by the amount of W-2 wages paid by the company and / or the unadjusted basis of qualified property (such as machinery and equipment) owned by the company.
The restrictions will be introduced gradually; for example, the phasing-out applies to joint applicants with taxable income up to $ 100,000 above the threshold and other applicants with taxable income up to $ 50,000 above the threshold.
If the threshold applies to your business, you may be able to salvage all or part of that deduction by deferring income or speeding up deductions to keep income below dollar limits (or subject to a smaller deduction spout) for 2021.
More small businesses are able to use cash (as opposed to accrual) accounting than was allowed in previous years. To qualify as a small business, a taxpayer must pass a gross income test, among other things, which will be passed for 2021 if, during a three-year test period, the average gross annual income does not exceed $ 26 million (next year, that dollar), the amount is said to be 27 million Dollar rise). Not too many years ago it was $ 1 million.
Cash taxpayers may find it easier to move income off, for example by deferring bills until next year, or by speeding up spending by paying bills early or making certain prepayments.
Businesses should consider incurring expenses that qualify for Paragraph 179 for Business Ownership Expenditure. For tax years 2021, the federal spending limit is $ 1,050,000 and the investment cap is $ 2,620,000.
Expenses are generally available for most depreciable assets, with the exception of buildings, and for commercially available computer software. It is also available for the interior of a building (but not its extension, elevators or escalators, or the internal structure), roofs, and for HVAC, fire, alarm and security systems.
Since this deduction is not made over the course of the year as is the case with normal depreciation over the useful life of the asset, eligible purchases can also be recognized in full as expenses in the last days of the year, within the limits of the limits. Incidentally, most of the federal states have different and much lower spending limits. Arkansas, for example, only allows up to $ 25,000 to be withdrawn under Section 179.
Corporations can also claim the 100 percent federal bonus depreciation allowance for the first year for used (with a few exceptions) or newly purchased machinery and equipment if purchased and put into service that year, as well as qualified improvement property, as above in connection with the withdrawal of 179. The 100 percent bonus deduction is available even if qualifying assets are only in operation for a few days in 2021. Again, most states, including Arkansas, don’t offer this generous deduction.
Companies may be able to use the “de minimis safe harbor” option to charge the cost of lower-cost assets, materials and supplies, as long as the costs do not have to be capitalized under UNICAP rules.
To qualify for election, the cost of a unit of ownership cannot exceed $ 5,000 if the taxpayer has appropriate annual accounts (AFS, e.g., certified audited accounts along with an independent auditor’s report). In the absence of an AFS, the cost of a unit of ownership cannot exceed $ 2,500. If UNICAP rules aren’t an issue and potentially rising tax rates aren’t an issue in 2022, then you should consider purchasing qualifying items before the end of 2021.
A company (other than a large corporation) anticipating a small net operating loss (NOL) in 2021 (and significant net income in 2022) might find it worthwhile to accelerate just enough from its 2022 income (or just enough from its 2021) postpone). Deductions) to generate a small net income for 2021. This allows the company to base its estimated tax rates for 2022 on the relatively small amount of income reported in its 2021 statement, rather than based on estimated taxes based on 100 percent of its own. to have to pay significantly higher taxable income in 2022.
Year-end bonuses can be timed by employers on both a cash and a reserve basis for maximum tax benefit.
Cash-based employers deduct bonuses in the year paid so they can be matched to the maximum tax benefit. Accrual-based employers deduct bonuses in the accrual year if all related events are identified with reasonable certainty. However, the bonus must be paid within 2½ months of the end of the employer’s tax year so that the deduction is permissible in the previous credit year.
Accrual employers looking to postpone deductions to a higher taxed future year should consider changing their bonus plans before the end of the year to set the payment date to a later than 2.5 month window, or changing the terms of the bonus plan to prevent the bonus amount end of year can be determined at the end of the year.
Sometimes the disposition of a passive activity can be timed to make the most of the released suspended losses. If a reduction in 2021 income is desired, consider selling a passive activity before the end of the year to offset the suspended losses with 2021 income. If possible, the peak tax hikes through 2022 are an issue. Deferring the divestment of the activity until 2022 could save more taxes in the future.
So there you have it! We hope that Congress will soon clarify what our tax laws will actually look like in the future. Have fun with your tax planning!
Lane Keeter, CPA, is the Office Managing Partner of the Heber Springs office of EGP, PLLC, CPAs & Consultants (a full-service financial firm with offices in Heber Springs, North Little Rock, and Bryant) and a former Sun-Times Reader’s Choice winner Award for the best accountant.