Year-end tax planning has always been critical for businesses, but it’s even more essential in a year when prior tax legislation may be giving way to new tax legislation. Alone, the proposed Biden tax changes are enough to turn business tax planning on its head. Combine these with the expiration of existing tax rules and you may be looking at a very different tax picture for the 2021 filing year ahead.
There’s a standard caveat when working with existing and proposed tax rules: everything is subject to change. There’s a chance that Biden’s proposed tax changes don’t make it through Congress in their current form. That makes tax planning challenging at best. However, businesses should first focus on what is known before concentrating on the “what if” planning for potential changes under the Biden proposal.
Take Advantage of Existing Tax Rules
Some of the more widely used COVID-related relief programs, such as the Paycheck Protection Program are no more. But opportunities continue to exist to claim COVID-related tax credits through the end of the year and even retroactively for prior quarters.
Employee Retention Credit
The employee retention credit (ERC) was initially enacted in March 2020 to assist employers and encourage them to maintain their workforces. The program was modified late last year to expand the available credit from 50% to 70% of qualified wages through December 31, 2021.
The ERC was one of several pandemic-related relief measures designed to assist employers and encourage them to maintain their workforces. The ERC was enacted under the CARES Act as a fully refundable tax credit that could be claimed by employers who managed to keep employees on their payroll. The changes also expanded eligibility to companies with 500 Full-Time Equivalent (FTE employees, up from 100.
New ERC rules also make it easier for businesses to qualify. Any business that suffered a 20% reduction or greater in quarterly gross receipts for any reason compared to the same quarter in 2019 is eligible to file a claim.
All eligible employers can claim the ERC through December 31, 2021, on qualifying wages paid after June 30, 2021, and before January 2022.
Family and Sick Leave Credits
Although federal requirements that employers provide enhanced paid family and sick leave ended last year, payroll tax credits are still available in 2021 for certain employers who chose to continue the benefit. Qualifying paid leave is also available for employees when getting the vaccine or to recover from the vaccine’s side effects.
Playing Catch Up with Credits
Businesses that did not claim available tax credits from any program on their original returns can still amend prior quarterly filings to claim them.
“What If” Planning for Biden’s Proposed Tax Plan
This is where year-end planning gets tricky because we can’t know with any degree of certainty how the final changes will look. But, because some of the changes may be significant for many business owners, it’s still worthwhile to do some contingency planning, starting with the elimination of the Qualified Business Income (QBI) tax deduction for high earners.
Elimination of the Qualified Business Income Tax Deduction
Currently, the QBI deduction allows certain types of “pass-through” entities (particularly LLCs, S corporations, and some sole proprietorships) to deduct 20% of their business income so that only 80% of their remaining income is taxable. The deduction for high-earning business owners of specified service or trade businesses (i.e., doctors, lawyers, consultants, financial advisors) is completely phased out if their earnings exceed $429,000 in 2021.
Under the proposed rules, the QBI is to be phased out for all businesses where business owner earnings (from all sources) exceed $400,000. That is especially significant because Biden also wants to raise the top individual tax rate to 39.6% for those same individuals.
This might be one of those times it makes sense for business owners to do what they can to accelerate earnings into this year and push deductions into next year. Consult with your tax advisor to determine if this strategy will benefit you.
Research and Development Expenses
This change won’t affect as many businesses as the elimination of the QBI deduction, but even businesses with modest R&D expenses will feel the pinch. Currently, businesses have some flexibility in determining whether to deduct R&D expenses in the current year or capitalize and amortize them over a number of years. Under the proposed changes, the IRS will require R&D costs to be capitalized and amortized over five years for costs incurred in the U.S. The effect on cash flow will be significant for many businesses. To comply with the new rule, businesses will need to track their R&D costs with a much higher level of specificity.
While there is an outside chance this provision gets removed from the final bill, businesses should take steps now to put procedures in place to begin documenting their R&D costs.
Business Interest Expense Limitations
Under the proposed rule, depreciation, amortization, and depletion will no longer be added back to calculate adjustable taxable income (ATI). Businesses will be limited to an annual interest expense equal to 30% of ATI, effectively reducing the maximum deductible interest expense by 30% of annual depreciation, amortization, and depletion. Limiting allowable interest expenses will have a significant impact on cash flows for many businesses.
Again, there is uncertainty whether this rule change will make it into law, but it is definitely on Congress’s radar.
Year-end Planning for the Known and Unknown
It has always been hard to make predictions about the future of taxes under a new administration. But we do know for sure that tax planning will not be any less complicated between now and year-end. This year it will be especially critical to plan for what is known—the expiration of beneficial tax credits—and unknown—the possible provisions that could raise taxes or hurt cash flow.
New York State’s (Lack of) Guidance on PTET SALT Cap Workaround
As you may know, the state of NY has placed huge limitations on the SALT tax deductions for business owners. Earlier this year, though, they enacted a workaround for the $10,000 SALT deduction limitation for Pass-Through Entity (PTE) businesses in its budget bill passed into law in the spring 0f 2021.
However, no guidance was provided on how to handle this workaround until August 25, 2021. So, not only were pass-through business owners awaiting clarification on how to implement the workaround, but have since found out that the deadline to apply is rapidly approaching. The election must be made by October 15th, 2021 and the 2021 PTET payment must be made on or before December 31, 2021 to be eligible for the deduction.
And, there is one other caveat. The election must be made by an authorized officer, partner, or member of the entity. Third parties, including CPA firms and law firms, cannot file the election on behalf of the entity. The state has set up a link where business owners can make the election.
Trivium Point Can Help
If you are a business owner in need of year-end, year-round, or PTET SALT tax guidance, the advisors at Trivium Point Advisory are here to help. Simply schedule a complimentary introduction call with us today. We can walk you through these tax legislation changes and challenges together.