The end of summer prompts many of us to think about how quickly the next few months will pass. For your business, it likely spurs you to assess whether your revenue goals are being met and determine whether you need to make adjustments. To optimize your bottom line, you should spend equal time evaluating expenses, tax obligations and tax minimization strategies.
Ongoing and Limited-Time Tax Minimization Opportunities
Some tax minimization strategies ring true every year. Don’t ignore these. Walk through these ongoing opportunities with the current business climate in mind. This will help you pinpoint opportunities that were not available to you in the past. It can also help you better grasp the optimal timing of expenses.
Other tax minimization strategies need special attention because of their unique timing and circumstance. Programs expire, get extended or have their rules changed mid-stream. These opportunities are sometimes complex, but taking time and effort to understand and potentially integrate them into your business strategy is often worth it.
Review these strategies for 2021 to ensure that you meet your tax obligations without paying more than necessary.
Tax Minimization Strategies for 2021
1. Section 179 Accelerated Deductions
The 2017 Tax Cuts and Jobs Act (TCJA) temporarily allows businesses to write off specific expenses immediately, instead of over several years. Section 179 deductions cover many normal purchases such as software, computers and even certain vehicles.
To claim immediate deductions in 2021, the qualified purchases must be both purchased and put into service by December 31, 2021. The maximum Section 179 deduction in 2021 is $1.05M, with a total equipment purchase limit of $2.62M. For example, if you installed or upgraded your building’s air filtration system in response to COVID-19, it may be included within Section 179 as a qualified improvement to a building’s interior.
2. Plan Your Taxable Income and Deductions
Businesses that operate on a cash accounting basis usually have flexibility to make purchases and do invoicing at times that are beneficial to you. For this strategy, consider your cash flow situation as well as your expected tax brackets for 2021 and 2022.
For tax purposes, it is often best to record income in the year you have a lower tax rate and record expenses when you have a higher tax rate. If you delay invoicing some of your clients until 2022, it will push the income and the associated tax due into 2022. Similarly, deductible purchases in 2021 would reduce your overall tax expense.
3. Section 199A Qualified Business Income Deductions
Small business owners who have pass-through businesses (sole proprietors, partnerships, LLCs and S-corps) have another TCJA benefit. Section 199A allows for a Qualified Business Income Deduction (QBID) of up to 20%. This deduction would be lower based on qualified expenses or contributions to retirement plans, health insurance or the deductible part of self-employment tax.
Capital gains and income thresholds for people that work in specific service businesses also apply. The Journal of Accountancy offers several examples that may help you understand Section 199A better.
4. R&D Dollar-for-Dollar Tax Credits: Not Just for Big Companies
The Research and Development (R&D) tax credit is one of the most underutilized credits. 2021 is the year you need to dig into the details. Last year’s 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily changed the net operating loss (NOL) rules. It allows companies to retroactively apply NOLs further back and in more situations. This creates a huge opportunity for businesses to recoup R&D credits.
Have you developed software in house or hired contractors to do it? If you are an architect, or a business that uses physical, biological, engineering or computer sciences in your work toward creating a new or improved product, you may qualify for the R&D credit. This helps to significantly offset labor costs. Find more details in The CPA Journal, which explains that R&D tax credits are not restricted to medical and scientific discovery.
5. Retirement Plans and Charitable Contributions
When you contribute to a retirement plan, you often reduce your taxable income. The 2021 limit for 401(k) contributions is $19,500; you can add $6,500 more if you are over 50. Converting a 401(k) and/or traditional IRAs to Roth IRAs also can have tax benefits. Roth contributions use after-tax dollars so you can withdraw the funds tax-free in retirement.
Charitable contributions can also provide tax savings, but normally, only when you itemize. This year is an exception. Sections 212 and 213 of the Consolidated Appropriations Act extended the CARES provision that allows individual filers to claim $300 and married couples to claim $600 in charity contributions whether they itemize their tax returns or not.
6. Payment of Deferred Payroll Taxes
The CARES Act permitted companies to delay remitting payments to the Internal Revenue Services (IRS) for 2020 payroll taxes in order to keep more money flowing in the economy. Half of the amount was due by December 31, 2020. The remaining amount is due January 3, 2022. If your business accepted the deferral, you may have the flexibility to record the expense in either 2021 or 2022 if you have not already made your payment.
7. Original 2020 PPP Loan Expenses Deductions in 2021
Businesses that received PPP loans in 2020 incurred expenses that they paid with the proceeds. The Consolidated Appropriations Act (CAA) created a safe harbor that allows those who had not deducted those expenses on their 2020 tax return to include them on their 2021 returns without needing to amend their 2020 return.
Expect More Changes Before the Year is Over
The COVID-19 pandemic continues to affect businesses with revenue, labor, supply and compliance challenges. Several programs, grants and tax credits were created to spur the economy, keep businesses afloat and ease the transition back to normalcy. The American Rescue Plan gives employers tax credits that provide paid leave for employees receiving COVID-19 vaccinations through September 30, 2021.
The Payroll Protection Program (PPP) has already concluded, but it continues to play a leading role in the economy. The IRS modified its guidance in early August for the Employee Retention Credit, potentially making thousands of businesses who received PPP funds now eligible for the credit.
Keeping up with tax code legislation and guidelines will continue to be necessary so your business can minimize tax liability. To reduce the stress of staying on top of these constant changes yourself, contact Paro today. Our tax experts stay up to date on state and federal regulations for your entity type and will ensure you file accurately and optimally.