The tax filing deadline is approaching for businesses and you may be looking to reduce business tax liability for 2021. All these strategies may not be applicable to your business, but by implementing some of them, your businesses’ tax liability for the 2021 tax year could be lowered.
Be sure to have a discussion with your tax advisor to determine if the strategies listed below are appropriate for your business. It is also important to note that sound business decisions should take precedence over tax considerations.
1) Defer or Accelerate Business Income
One way that a business can reduce its tax liability is by projecting its business income for this year and next. This will help you decide if you should defer income, allowing you to defer tax. If using the cash method of accounting, a business can defer income by holding off billing for products or services at year’s end. If the accrual method is used, income can be deferred by delaying the shipping of products or delivery of services until the following year. It’s generally better to defer tax, but don’t let tax considerations interfere with appropriate business decisions.
On the other hand, a business that is a pass-through entity may want to accelerate income and defer deductible expenses. This is because it is likely that your business will be in a higher tax bracket the following year. By doing this, it may reduce business tax liability over a two-year period.
2) Qualified Improvement Property and Bonus Deprecation
Qualified improvement property (which includes improvements to nonresidential real property such as roofs, HVAC equipment, fire protection and alarm systems, and security systems) completed by the end of 2022 may make it eligible for 100% bonus depreciation, as well. Qualified assets that include new tangible property that has a recovery period of 20 years or less (i.e. office furniture and equipment, off-the-shelf computer software, and water utility property) are eligible for bonus depreciation as an additional first-year depreciation.
If qualified improvements are completed after 2022, the bonus depreciation is scheduled to gradually reduce so completing them now will provide you with the greatest opportunity to reduce business tax liability.
3) Employee Retention Credit and Paid Leave Credit
Another way businesses may be able to reduce their tax liability for 2021 is by claiming two COVID-19 related tax credits available to them for the 2021 tax year – the Employee Retention Credit and Paid Leave Credit.
The Employee Retention Credit (ERC) is for employers who had to suspend operations fully or partially as a result of an ordered COVID-related governmental shutdown. Additionally, businesses which had their gross receipts decrease by more than 50% versus the same quarter of the previous year, are eligible, as well. Businesses must meet certain additional requirements to claim the ERC which equals 70% of the first $10,000 of eligible wages per quarter, per employee.
The paid leave credit allows qualified employers a federal payroll tax credit for 100% of qualified sick and family leave through September 30, 2021. The credit equals $511 per day of an employee’s own illness or quarantine and $200 if the employee had to take leave to care for others.
4) Net Operating Loss Deductions
If your business’ expenses and deductions exceeded its revenue, it is important to know how to claim a net operating loss (NOL) deduction for the year so it reduces your business tax liability. The Tax Cuts and Jobs Act changed the amount of taxable income eligible to be offset by NOL deductions from 100% to 80% in any one tax period. Although, NOLs can be carried forward indefinitely applying the losses to future tax years until the loss is recovered. Carrying NOLs back to prior tax years is prohibited.
5) Deductibility of Meals for Businesses
Making sure your business is taking deductions for business meals will provide it with another way to reduce its tax liability. The Consolidated Appropriations Act, which was signed into law in December of 2020, changed the deductibility of meals for businesses. Starting January 1, 2021 and continuing through December 31st, 2022, food and beverages purchased from a restaurant will be 100% deductible. Restaurants do not include businesses that primarily sell pre-packaged food. Prior to this change, meals were only 50% deductible. This temporary 100% deduction was designed to help restaurants which have been hit hard by the COVID-19 pandemic. For all other business meal expenses, the 50% meal deduction still applies.
If you have any questions about how these or other tax planning strategies can be implemented to reduce business tax liability, please contact your Untracht Early advisor.