This has been a year of unique challenges. Year-end planning for 2021 may require more strategy than any other year in recent history. Business owners have been managing through a pandemic that has impacted them with remote working, supply chain issues, business disruption, travel restrictions, etc. The pandemic has resulted in the implementation of many regulatory and legislative changes that should be considered for year-end planning.
While we can’t ignore the standard year-end business and tax strategies such as income deferral or acceleration, funding of retirement plans or accelerated depreciation on capital purchases (IRS code sections 179 and 168(k)), the uniqueness of 2021 requires additional considerations of the following:
- State and Local Tax (SALT) Deduction: The Tax Cuts and Jobs Act (TCJA) limits the amount of state and local taxes an individual can deduct for federal tax purposes to no more than $10,000.00. Many states have enacted legislation to offer taxpayers a “workaround” to the SALT cap by enacting passthrough entity-level taxes. Effectively imposing the tax liability to owners of passthrough entities (PTE) instead of directly on the PTE. These new state PTE taxes provide an opportunity for owners to avoid SALT limit by allowing their share to be paid at entity level utilizing the “trade or business” exemption. The following states have enacted SALT cap workaround laws: Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Georgia, Idaho, Louisiana, Maryland, Minnesota, New Jersey, New York, Oklahoma, Rhode Island, South Carolina and Wisconsin.
- Home Office Deduction: The pandemic has forced remote working for many businesses. Business owners may be able to claima home office deduction for mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent on IRS Form 8829. Generally, there are two basic requirements: (1) Exclusive use of a portion of the home for conducting business on a regular basis and (2) Home must be taxpayer’s principal place of business – includes managerial and administrative activities conducted at the home and there is no other location to perform these duties.
- COVID-19 Economic Injury Disaster Loans Program (EIDL): The U.S. Small Business Administration made the following significant changes to the program:
- Raised the EIDL loan cap from $500,000.00 to $2,000,000.00.
- Added commercial debt and federal business debt payments to the following approved uses – working capital, payroll and purchasing equipment.
- Implemented deferred payment period: Repayments will not have to begin until two years after loan origination.
- The COVID-19 EIDL program runs through December 31, 2021. The program offers 30-year loans with fixed rates of 3.75% for small businesses including sole proprietors and independent contractors, and 2.75% for not-for-profits.
- Employee Retention Credit (ERC): For 2021, the Employee Retention Credit is a quarterly tax credit against the employer’s share of certain payroll taxes. The tax credit is 70% of the first $10,000 in wages per employee in each quarter of 2021. This translates to a $7,000 credit per quarter and up to $28,000 per year, per employee. This credit applies to your business under the following conditions:
- Company was at least partly closed due to a government or the business’s revenue declined by 20% or more for any quarter this year, compared to the same quarter in 2019 (or 2020 if company wasn’t in existence in 2019).
- Company kept employees on payroll.
- COVID-era property tax relief planning: Economic and business conditions caused by the pandemic may have impacted property values. There may be an opportunity to document COVID-related valuation losses to save property taxes for business owners. The appealing process should be initiated well before deadline for property tax return amendment and real estate tax protest. The following COVID-related conditions should be reviewed for purposes of protest: Impact on sales revenue, additional expenses incurred, facility and equipment utilization rates, impact of workforce/headcount and impact on supply chain.
Given the circumstances surrounding business conditions in 2021 we would recommend an early start on your year-end business and tax planning. We suggest you discuss these matters with your financial advisor and tax professional.