A year’s fourth quarter is traditionally a time to review tax planning for the upcoming year. The third quarter of 2021 remains a good time, however, this fourth quarter brings particular challenges.
At this moment, no one knows the fate of President Joe Biden’s $3.5 trillion spending plan. There is disagreement, even among Biden’s fellow Democrats, about what should be in the plan, how much it actually should cost, and what taxes will be affected to help pay for it all.
When the federal government gives or takes away in the form of taxation and rules, it affects everyone, individuals and businesses alike. For example, the Biden administration says that no one who makes less than $400,000 a year will see an increase in their income taxes.
But that’s only part of it: many business owners’ incomes exceed those amounts. A business owner seeing an increase on their business taxes also sees a toll, particularly in an inflationary environment. Their likely, natural response, and economics-driven response will almost invariably be to: raise prices, rents, hourly rates – whatever will keep them from being punished by government-mandated cost increases.
It was hoped – and suggested – in July by Federal Reserve Chairman Jerome Powell that inflation would be a short-term problem, abating after several months; however, the short-term outlook is complicated by continuing events. On Oct. 1, CNBC reported that in August, a key inflation marker hit a 30-year high. In this environment, having their taxes increased at the same time they’re dealing with inflationary pressures, can be daunting for business tax planning.
Nevertheless, such planning remains valuable. And there are core elements of tax planning that are consistent from year to year. What follows are several of them.
- Defer income, accelerate expense payments: The Tax Cuts and Jobs Act of 2017 changed the law to enable businesses with three years of average gross receipts of $25 million or less to use the cash accounting method, a radical revision from the previous limit of $5 million.
A business can lower its tax liability by deferring income as much as possible into 2022, at the same time accelerating their present expense payments. The purpose: if you haven’t been paid for a project in 2021, it reduces your taxable 2021 income. Accelerating expense payments reduces present-year taxable income. Combined, the two may drop you into a lower tax bracket.
- Use of the Employee Retention Credit: As the IRS explains: “Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as originally enacted March 27, 2020, the Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees.” Wages must have been paid between June 30, 2021 and Dec. 31, 2021. The IRS issued Revenue Procedure 2021-33 to provide fourth-quarter tax planning direction.
Generally, the maximum per-employee ERC for 2021 is $28,000; however, if a business began operating after Feb. 2020, and suspended its operations due to government orders, the maximum ERC can reach $50,000. on Aug. 21, 2021 that IRS put out IRS Notice 2021-49, its latest guidance on the ERC.
- Home office deduction: Covid-19 motivated or necessitated the mass movement of small business owners from offices to working from home. Home office tax deductions exist, but claiming it can be intimidating for taxpayers because of fears the IRS will turn an interested eye on the figures and records used to seek the deduction.
To make claiming the deduction less burdensome, the IRS has what it calls the simplified option. The IRS says this “can significantly reduce the burden of recordkeeping by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.”
The regular method for claiming a home office deduction requires compiling the actual expenses of operating the home office, and may include mortgage interest, utility, depreciation, and other expenses.
Additional IRS information on the home office tax deduction is accessed on the IRS website.
- First-year bonus depreciation: For property, both new and used, that in 2021 a business obtained and put into use, the potential exists for a 100% first-year bonus depreciation deduction.
This is a short list of possibilities; depending on a business, there are many other tax liability-reducing strategies and tactics available to businesses. But reading through some of revenue procedures and IRS Notice guidance will quickly reveal their intricacy and complexity. A qualified, experienced accounting firm provides a business owner with their best avenue to travel toward accomplishing a principal business goal: saving money through good planning.
Don’t wait until it's too late. For more information of fourth quarter tax planning or other tax questions, contact the the tax team at Rodefer Moss. They understand that each situation is different and can help you determine the best plan to remain compliant with current tax law.
