2021 Year-End Tax Planning for Businesses
Year-end tax planning for businesses is especially difficult for 2021 because the Build Back Better Act has the potential to impact broad areas of taxation. Congress continues to negotiate a compromise. Unfortunately, it is difficult to know what is likely to emerge as the final version. In addition, although the effective date for most of the provisions in the Build Back Better plan are tied to the enactment date, January 1, 2022, or even later, a few proposals may be retroactive.
Here are some highlights of current proposals under the Build Back Better Plan that may impact businesses:
- Effective in tax years beginning after December 31, 2022, the Section 250 deduction may be reduced from 37.5 percent of the foreign-derived intangible income plus 50 percent of the global intangible low-taxed income amount (if any) included in the gross income for the tax year to 24.8 and 28.5 percent respectively.
- Owners of pass-through businesses may be impacted by an expanded application of the 3.8 percent net investment income tax. A modification to the net investment income tax starting in 2022 would classify pass-through income as investment income subject to the NIIT even if the taxpayer materially participates in the business.
- Currently scheduled to expire after 2025, the disallowance of excess business losses may be made permanent. An excess business loss is the amount by which the total deductions attributable to all of the taxpayer’s trades or businesses exceed their total gross income and gains attributable to those trades or businesses plus a threshold amount adjusted for cost of living. For tax years beginning in 2021, the threshold amounts are $262,000 (or $524,000 in the case of a joint return).
- Under current law, a tax credit may be available in 2021 for a taxpayer who places a new qualified plug-in electric drive motor vehicle in service. The maximum credit is $7,500 and is reduced once a manufacturer sells 200,000 eligible vehicles for use in the United States. However, taxpayers may want to hold off on making that purchase until 2022. Under proposals in the Build Back Better Act, it could mean an additional $5,000 credit. If the credit is not currently available, the tax savings increase to $12,500.
- Corporations with average annual adjusted financial statement income greater than $1 billion ($100 million for members of an international financial reporting group) may be subject to a 15% alternative minimum tax in tax years beginning after December 31, 2022.
- A corporate interest deduction limit may be imposed on certain members of international financial reporting groups effective in tax years beginning after December 31, 2022.
Changes in the taxation of corporations and pass-through entities always makes it a good idea to review choice of entity decisions to make sure the current entity structure continues to make the most sense.
Expiring Tax Provisions
Taxpayers might consider taking advantage of the following tax benefits in 2021 before they expire.
Employee Retention Credit. The recently passed Infrastructure Investment and Jobs Act includes a tax provision that terminates the employee retention credit early. With the exception for wages paid by an eligible recovery startup business, wages paid after September 30, 2021 are no longer eligible for the credit.
Research and experimental expenditures. Under present law, research and experimental expenditures are deductible in the year paid or incurred or at the taxpayer’s option, amortizable over a period of not less than 60 months beginning in the month that benefits are first realized from the expenditures.
Beginning in 2022, research and experimental expenditures performed in the United States are required to be amortized ratably over five years and over fifteen years for foreign research. Taxpayers may want to consider the implications of the upcoming changes in 2022 tax year.
Deferred Payroll Tax Payments. Employers that took advantage of the option to defer payroll taxes due from the period beginning on March 27, 2020 and ending on December 31, 2020 must prepare to make the payments. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
There is no one size fits all for tax planning and any tax strategy may have unintended consequences if the taxpayer’s situation is not appropriately evaluated to consider the future changing tax landscapes.