Preface: “If I have ever made any valuable discoveries, it has been due more to patient attention, than to any other talent”
― Isaac Newton

If Inflation Conditions Where Will Your Business Be? (Segment III)

Entrepreneurs looking for the truths of inflationary business navigation should consider that most research points to a clear correlation between commodities prices and the measurement of inflation trends with the consumer price index. The consumer price index incorporates a number of goods, food at home, food away from home, energy, gasoline, new vehicles, used vehicles, electricity, and commodities. 

Historically, trends in commodity indexes have consistently correlated closely with inflation while typically uncorrelated with equity and bond market trends say. The phrase “commodity business” is often highly partisan, yet entrepreneurial participants in commodity products such as corn or wheat, cotton or coffee, sugar or lumber – should generally welcome economic developments with an inflationary trend towards a brighter future. Given this historic hinge, commodity-based businesses may continue to gain perspective altitude should inflation persist and its momentum elongates.

Considering that in the early 80s, when inflation was effectively reigned in, when Fed Chairman Volcker increased the prime-rate at a rocket fuel rate, creating a host of changes for commodity entrepreneurs from the mid-west corn belt to mining enterprises. The decade following for those highly leveraged in certain industries were perhaps not the best of years. Today unlike variables again prevail for stakeholders in the commodity complex, including but not limited to thee following, tax legislation, expansion in monetary aggregates, monetary controls, and supply logistics. 

Firstly, every taxpayer is a commodity stakeholder, from fuel or food purchases say. So the marginal pressure in higher operating costs transfers the pricing baton from one stakeholder to the next, i.e., one business’s expenses are another revenue. Another example is as the cost of new construction increases from raw materials of say lumber or steel, this flywheel creates more income for those sourcing those goods from inventories at the higher value, say? Secondly, say for some crypto speculator, $50.00 per bushel wheat would likely not be enough incentive to purchase a farm and learn to drive a tractor or combine.

Therefore, despite the higher cost of toast for breakfast, and the corresponding lack of incentives to fix the logistics of a supply chains with that commodity scenario, is would likely not be resolved from a computation of a few more algorithms to manufacture $$$M of virtual currency.  

Concerningly, leading economic spoke-persons have repeated said that inflationary pressures are transient. If inflation is a trend with monetary motion, we should perhaps consider a snippet of  historic wisdom from Sir Isaac Newton – Newton’s first law of motion. In Newton’s first law, an object will not change its motion unless a force acts on it. Further, In the second law, the force on an object is equal to its mass times its acceleration. In the third law, when two objects interact, they apply forces to each other of equal magnitude and opposite direction. 

The point of referencing Newton’s laws is that after $$.0T of the monetary motion says to restart the economy since the Pandemic shutdowns, there has been a lot of monetary acceleration in asset prices. What is the affordability of a reprise? Bottom-line, any intentional effort short of gradual decreases in acceleration will create visible challenges for entrepreneurs, i.e., why would anyone entrepreneur with momentum want inflation to slow, yet? 

Shifting to logic -for those who enjoy math, let’s reflect on the following. 

https://www.omnicalculator.com/math/exponential-growth

Consider the following problem: the population of a small city at the beginning of 2019 was 10,000 people. It was noticed that the population of the city grows at a steady rate of 5% annually. What should you do to calculate the projected population size in the year 2030? From the given data, we can conclude the initial population value, x₀, equals 10,000. Also, we have the growth rate of r = 5%.

Therefore, the exponential growth formula we should use is:

x(t) = 10,000 * (1 + 0.05)t = 10,000 * 1.05t.

Here t is the number of years passed since 2019. In our case, for the year 2030, we should use t = 11 since this is the difference in the number of years between 2030 and the initial year 2019. Finally, we get:

x(11) = 10,000 * 1.0511 = 17,103.

So, the projected number of inhabitants of our small city in the year 2030 is around 17,103.

……..There are numerous cases where the formula for exponential growth and decay is used to model various real-world phenomena:

• • • • population growth of bacteria, viruses, plants, animals, and people;
      • the atmospheric pressure of air at a certain height;
      • compound interest and economic growth;
      • the processing power of computers etc.

[end of quote]

Looking forward to the next decade of pricing expectations in entrepreneurship , will revisions to the above exponential growth formula be necessary based on the following data? 

–From 1913 to 2008, the US Money Supply increased $800.000B; From 2008 to 2021, it grew from $800B to $8,800B.

Compounding interest is a sharp double-edged sword. Now, if Sir Isaac Newton were only sitting in his orchard, and could  construe and publish the possibilities and essential amendments to the above formula for a stable price variances in the the worlds entrepreneurial marketplace through 2032 say?

Until next time….

Preface: The Fed indicated in mid-December that plans to wind down stimulus would be accelerated after U.S. consumer inflation hit a 39-year high.— Joe Mcdonald, 6 Jan. 2022

If Inflation Conditions Where Will Your Business Be? (Segment II)

As the gradual economic conditioning of the Pandemic continues, leading to perhaps stark increases in input costs from trucks, cargo vans, fuel, wage competition, tools, repairs, maintenance, and the corresponding vendor shortages of available and necessary supplies, keeping up with rises in the producer price index is an increasing challenge for most entrepreneurs. Further, these growing financial entrepreneur challenges are before the possibility of the complexity from government implemented inflationary price controls, to reference the Murray Sabrina quote earlier.

Entrepreneurs who have invested in effective ERP software to manage inventory costs and price changes for manufacturing batches or other input variables will see those efforts pay significant dividends in a persistent inflationary environment. On the contrary, businesses that lack user expertise, necessary ERP training, or perhaps an up-to-date ERP infrastructure should be particularly concerned about the ease of maintaining decisive profit margins. Especially if inflationary conditions take root and pricing variables turn increasingly complex.

In a rapidly changing business environment with product or service costs required to conduct business, particularly inventory intensive and manufacturing businesses, historical reliance on price stability will result in sub-par financial performance and act as a quasi price control measure that will burden profitability. The necessity of practical ERP systems functions is not a solution in its entirety. They are only an element of a more comprehensive mechanism to managing inflationary conditioning in the marketplace.

Research provides a clear precedent that watching financial metrics and implementing financial accountability throughout an organization is an activity of most businesses successfully navigating inflationary conditioning. This comprises that every dollar management spends approved with a measured effect to its leverage on the enterprise’s profitability.

We suggest diligent entrepreneurs read the following article—

https://deloitte.wsj.com/articles/the-inflation-outlook-preparing-for-the-unpredictable-01642097150

Excerpt: For many executives, a key question entering the new year is how to prepare for the threat of inflation. For much of last year, economists debated whether rising prices were a temporary phenomenon or a troubling signal of difficult times ahead. The mainstream position, shared for much of 2021 by U.S. Federal Reserve Chairman Jerome Powell, was that they reflected short-term pressures that should soon ease—i.e., that inflation was “transitory.”

But as higher prices spread across the U.S. economy in the fourth quarter of 2021, economists and policymakers shifted their stance and acknowledged that inflation could persist for longer than previously expected. As 2022 gets underway, there is growing concern that we could be entering uncharted waters. The ongoing COVID-19 Pandemic has led to supply- and demand-side shocks, with disrupted supply chains, unprecedented levels of government fiscal stimulus, shifts in consumer spending, a decline in labor force participation, and persistent business uncertainty. Adding further complexity, inflation has been uneven across industries2 and countries.

The outlook for inflation is also on the minds of many executives: Deloitte’s fourth-quarter 2021 “CFO Signals” survey found inflation to be a top concern, with more than three-fourths (76%) of surveyed CFOs indicating their organizations will raise prices for a substantial portion of their products and services to offset recent input cost increases.

Furthermore, financial measures do not necessarily need to be all cost reductions. Still, they should be primarily focused on achieving the organization’s strategic objectives while minimizing spending on items that have minor effects on the long-term successes of the enterprise. Entrepreneurs should give particular executive focus on the long-term sustainable enterprise vibrancy. This must include, among other features, both training for team members and necessary capital expenditures to update aging assets. The financial decisions of allocating operating cash flows into investing and financing activities should be a continual strategic activity.

Additionally, some businesses will find that amidst wage competition and vendor shortages, an effective management tool is scaling lower the scope of enterprise activities and perhaps discontinuing low-margin activities or those with a minimal contribution margin that sap the available resources from core business functions.

Examples include:

• • • • Reducing options on manufactured products or certain customization features;
      • Discontinuing certain enterprise services;
      • Or more proactively — selling off an entire department;

The purpose of any such one of the above examples is to free your crucial enterprise resources to focus on the profit centers that drive the best performance. This, in turn, will also help to strengthen your team with additional bandwidth for improved service or production capacity on the crucial tasks at hand. Automation solutions and other strategic performance investments should also be weighted for return on investment.

 

Preface: It was the biggest inflation and the most sustained inflation that the United States had ever had. —Paul Volcker (1297 -2019)

If Inflation Conditions Where Will Your Business Be?

Credit: Donald J. Sauder, CPA | CVA

The debate of whether inflation is entirely a monetary phenomenon or a result of business decision-makers does little to effectively fix the business or societal implications, and additionally, both the immediate and long-term consequences — whilst we know that inflationary conditions commonly prevail in economies when too much money chases too few goods.

For decades entrepreneurs have flourished while enjoying relative price stability from artfully calibrated decisions on the prime rates and easy tax policies. The expansion of credit provided extra money for increasing player participation while expanding palates for the status quo.

Correspondingly the money supply has expanded substantially since the start of the Covid Pandemic in Q1 of 2020. But, not unbeknownst to your friendly bankers, the tools to track the creation of money that is chasing goods have swiftly changed as well, with the reporting on monetary instruments becoming increasingly opaque. Therefore, making informed financial decisions increasingly requires entrepreneurs to prepare for activities with both a sunny clime or perhaps concerning turbulence, plainly requiring a dual risk-management approach.

History has yet to demonstrate that any economy can print itself to a permanent plateau of prosperity. Yet is does teach that economies are powered by the willingness of participants to assume a variety of financial risks based on future rewards from those risks. These financial risks can range from spending savings for a vacation or purchasing a vehicle to homebuyer borrowing for an upgrade, small or large, to active or passive investing in a new enterprise start-up.

An entrepreneur’s cost of capital should be watched diligently at all times, but especially during inflationary times because as prices rise, balance sheets will need to scale — eventually. The business characteristic of utmost importance in inflation periods, known only to God say, is how long and intense the time will last. For simplicity, if the current negative range between the consumer price index and interest rates continues to drive negative rates of return, eventually the most robust balance sheets will atrophy, and the prudence of diligent savers should expect experiences of growing financial declines purchasing power.

Looking a demographics, an increasing number of entrepreneurs have minimal if any experience managing an enterprise during a prolonged period of inflation. Like the first day of school, inflation is exciting and always feels good when it starts. After a while, only a few extraordinary are enjoying the process, and then (fortunately and eventually), summer vacation arrives again. Similarly, for those students who apply themselves diligently and principled to the task of navigating inflation, it won’t be easy to keep on track from day one, but there will be a payday.  Inflationary hikes require that entrepreneurs be careful, cautious, and meticulous.

For instance, those businesses whose attempt to cut costs and accept lower quality output will be the proverbial students who fail the grade. Yet, reducing costs is essential. This phenomenon is largely overlooked today, not just for entrepreneurs but also for many taxpayers. Those on just-in-time budgets in prolonged inflationary periods will eventually discover that cost-cutting will be paramount to avoid insolvency.

A prime example is if a homeowner experiences increases of 10% to 12% in real estate taxes (this is occurring in some states), maintenance expenses, upkeep, utilities on the property will necessitate a corresponding increase in wages to maintain the status quo. If this turns into stagflation say, some will quickly discover that essentialism is not just a technical phrase. It is essential. Or to the contrary, what entrepreneurship effect would price controls create if implemented to protect households, and is your business prepared to navigate such conditions?

This leads us to a quote from Murray Sabrin, Ph.D

https://fortune.com/2021/12/09/next-recession-heres-everything-bubble-markets-2021-2022-covid-murray-sabrin/

 

A caveat is in order. As physicist Niels Bohr exclaimed, “Prediction is very difficult, especially if it’s about the future.” Nevertheless, I will weigh in fearlessly with my 10 cents. The Fed’s inflationary policies have increased my two cents fivefold. Maybe the next cryptocurrency is on the horizon: My 10 Cents.

If a dog can have a crypto, why can’t a retired finance professor who warned the public that prices were about to accelerate due to the Fed’s inflationary policies in the spring of 1976 have one?………..

My fearless forecast, therefore, is: Inflation accelerates in 2022. Then, the public outcry over skyrocketing prices and the media reports highlighting how prices are decimating the average family’s purchasing power may cause the Biden administration to impose wage-price controls as President Nixon did in 1971 to take the sting out of inflation before his 1972 reelection campaign. Biden could use an executive order if Congress doesn’t give him statutory authority to impose price controls.

Without price controls, I expect the Fed to raise the Fed Funds Rate, sometime in 2022 and to continue tightening in 2023. Thus, the next recession could begin in the fall of 2023, but no later than a year later. If the recession does not begin on schedule, it only means it has been postponed, not eliminated. 

President Jimmy Carter knew astutely how to solve that Euclidean algorithm from the 1970s inflation in a world reserve currency. Today – those like Murray Sabrina, quoted above, realize times have changed in monetary policy, and an  Administration can’t easily appoint someone to walk in the shoes of Paul Volcker because innovative monetary strategies will be required. Most entrepreneurs, realize this too?

To be continued. 

Preface: Find a great mentor who believes in you; your life will change forever! –Bill Walsh

10 Business Leaders Share Their Words Of Wisdom For First-Time Entrepreneurs

There is no shortage of advice blogs, books and podcasts about entrepreneurship these days. Sifting through all of this advice can take up valuable time and, unfortunately, not all of it will actually help you succeed.

That’s why it’s helpful to learn targeted tips from entrepreneurs who understand what it takes to launch and grow a successful startup. To share the good and warn against the bad, 10 members of Young Entrepreneur Council gave their advice for first-time entrepreneurs. Follow their tips when you need guidance to get you through the early days of your business endeavors.

10 Business Leaders Share Their Words Of Wisdom For First-Time Entrepreneurs

Preface: It is imperative that taxpayers who received the advance Child Tax Credit in 2021 be on the lookout for and keep the IRS Letter 6419.

Important Notice Regarding Advance Child Tax Credit

Credit: Matthew P. Glick

TLDR; Beginning in late December, the IRS started issuing Letter 6419, 2021 advance CTC to notify taxpayers of advance Child Tax Credit payments in 2021. These letters should be treated with the same importance as a W-2 or 1099 for tax filing purposes and retained for your tax filing.

If you are a parent, chances are that you’ve been receiving a deposit into your bank account each month to the tune of $250-$300 for every child listed as a dependent on your tax return. This is due to changes in the child tax credit which stem from the American Rescue Plan Act passed in March of 2021. The changes are valid for 2021 only, but they are substantial.

The first change increased the amount per child, and increased the age of eligible children from 16 to 17. For the 2020 tax year the amount was $2,000. That has now been increased to $3,000 and $3,600 for children under the age of 6. The second change made the credit fully refundable. This simply means that you can claim the credit even if you do not have the income to cover it.

While the previous two changes will most likely have the larger impact on the amount of taxes you owe, the third change that the American Rescue Plan brought about will have a larger impact on the process of filing your taxes. The third change prompted the IRS to start paying a portion of the credit in advance in monthly installments. This is much different from the method we are all used to, where the credit is calculated at the end of the year during tax time. This change has prompted the IRS to begin sending Letter 6419 to taxpayers who received the advance child tax credit.

This means that it is imperative that taxpayers who received the advance Child Tax Credit in 2021 be on the lookout for and keep the Letter 6419 along with the rest of the familiar tax forms and notices that they are used to keeping. Think of it like a W-2 from the IRS. This is their record of how much money they have sent you over the past year.

Keep in mind, however, that the amount of the advance payment was based on historical data provided to the IRS through previous tax returns. As we all know, circumstances change quicker than we tend to file our taxes, meaning that the amount that the IRS has been using to calculate the amounts for the advance payments is subject to change, pending confirmation at tax time.

So, what happens if the IRS used outdated information and issued an overpayment? The answer: it depends. If your income (Modified Adjusted Gross Income) is less than $40,000 for single or $60,000 for joint filers, there will be no repayment requirement. There is a phase-out that ends at $80,000 for single and $120,000 for joint taxpayers. Taxpayers with a MAGI over these amounts will have to repay any overpayment amount. Keep in mind that while we try to give the most up-to-date and concrete information available, individual facts and circumstances can impact these amounts. If you are concerned that you may have received an overpayment and are unsure if you will be required to pay it back, please contact your tax advisor regarding your individual situation.

So, are these changes here to stay? Currently, no. There was a provision in Biden’s Build Back Better act, which would extend these provisions into 2022, but after being passed by the House of Representatives, this plan failed to garner enough support in the Senate to become law. As things currently stand, the child tax credit is set to revert back to the pre-2021 level of $2,000 for children younger than 16, $1,400 of which will be refundable, and none of it will be paid in advance.

Should I Extend my Tax Return?

Credit: Jacob M. Dietz, CPA

 Tax Season

Time steadily keeps ticking.  Another year has nearly ended, another year will soon dawn.  Time brings new things and brings new opportunities to do old things.  Each year brings a new opportunity to file taxes, which is a practice that started millennia ago.

Some taxpayers always file timely, some always file an extension.  Which option is right for you?  Read this article to consider the benefits of both timely filing and filing after an extension.

Benefits of Timely Filing

• • • • Clarity and Precision
      • Avoid Procrastination
      • Allow Partners to File Timely
      • Calculate Quarterly Estimates

A taxpayer might file timely to gain clarity and precision.  Before the taxes are prepared for filing, the taxpayer likely does not know precisely how much the tax bill will be.  Good tax planning, however, might give an idea of the amount.  Think of tax planning as watching a deer walking through the field 200 yards away with the unaided eye.  You can see it with the unaided eye, but the clarity increases when the scope is placed between the eye and the deer.  Likewise, preparing the tax return brings the tax bill into focus.  A hunter catching sight of a big buck might shake with buck fever, and a taxpayer catching a glimpse of a huge tax liability might tremble as well.  Unfortunately, tax returns do not taste as delicious as a deer, although paying taxes can be salty.

Another reason to file timely is to avoid procrastination.  The wise old saying attributed to Ben Franklin “Don’t put off until tomorrow what you can do today” might inspire some taxpayers to take care of their taxes quickly, even though they could delay if they chose to do so.  Filing an extension causes a delay.  It does not drive taxes away permanently.

One important reason for partnerships to consider timely filing is that the individual partners will need a K-1 from the partnership to file their personal tax returns.  A partnership might therefore choose to file timely if some or all the partners want to file their personal tax returns timely.

A fourth reason to file timely is to calculate quarterly estimates for the next year.  The safe harbor for tax estimates factors in the income of the prior year.  If a taxpayer wants to use that safe harbor, it helps to know the prior year income.  If the taxpayer does not know it, then they may pay more estimates than necessary, or perhaps pay too little and miss the safe harbor.

Interest rates that banks pay you on cash is not high at the time of this writing.  If cashflow is good, a taxpayer might happily pay in a high amount in estimated taxes to try to cover the tax liability.  The lost interest earnings may be de minimis.  If they pay in more than is necessary, they could simply roll forward their payments and pay less later.

On the other hand, if cashflow is tight, a taxpayer may not want to pay any more than they absolutely must pay.

Benefits of Extensions

So why would anyone ever extend a tax return?  In some cases, the prudent taxpayer will file an extension.  Here are some reasons.

• • • Save on Accounting Fees
    • Wait to See if Tax Rates Increase
    • Wait to See if the Next Year Looks Profitable

Many tax returns are filed on an annual basis.  Tax accountants file scores of returns after December 31 but before April 15.  As you can imagine, that provides a buildup of work for tax accountants.  If you normally file timely but do not care when you file, consider asking your accountant if you can go on extension to get a discount since you are leveling out their workload.  The price savings may make it worth the wait.  Good things take time.  Sometimes the first buck trotting along the path is not the biggest buck.

From time to time throughout history, tax rates go up.  At the time of writing, we do not know exactly what tax increases will or will not come for next year.

If taxes increase significantly from one year to the next, some taxpayers may prefer to defer depreciation until future years, when tax rates are higher, rather than accelerate depreciation on new purchases this year when rates are lower.  Without knowing the tax rates, that decision is more difficult.  Some taxpayers may benefit from extending to see how it ends up.  Patience sometimes pays.

Another reason to extend is to assess how profitable next year will be.  If a taxpayer files in February, they have a small idea of how the next year will be, and they might find it difficult to make tax decisions on tax elections, such as depreciation.  Alternatively, a taxpayer filing in July would have a much longer timeframe to assess how well the next year is going.

If the next year appears to be going well, the taxpayer may save some depreciation to reduce income in that year.  Alternatively, if the year past was great and the next year is challenging, the taxpayer may elect to accelerate depreciation into the high-income year.  The additional months may reduce the guesswork.

To Extend or not to Extend?

 As you read the article, did any of the points resonate with you?  Different taxpayers will make different decisions.  Do not automatically file on time, and do not automatically file for an extension.  Consider which path makes sense in your situation.  Hopefully this article brings some clarity and perspective to you as you hunt for the answers.

This article is general in nature, and it does not contain legal advice.  Contact your advisors to discuss your specific situation.

Preface: “Happiness is the meaning and purpose of life, the whole aim and end of human existence” — Aristotle

Business Profits – The Journey to Bondage or Freedom

Credit: Donald J. Sauder, CPA | CVA

More than two thousand years ago as portrayed in Gospel of Luke, Joseph and Mary went up from Galilee out of the City of Nazareth into Bethlehem to be taxed. While many are familiar with the Christmas story, our purpose of mentioning it in this blog is that Joseph was required to take a mandatory vacation from his likely trade as a carpenter on account of a tax decree from emperor Caesar Augustus. Although the timing with the world-wide taxation decree was less ideal for the couple for whom God had a special purpose, the Wisemen knew it was all according to the perfect plan and additionally that Joseph and Mary were in complete compliance with the emperors tax regulations. For most tradesmen that historic time was supposedly not a journey of happiness or liberty.

Today as we enter 2022, business communities in the United States from east to west, north and south, are enjoying a journey through time that is unprecedented, extraordinary, and exceptional. It is to this cause that we wish reflect from an accounting perspective.

Double entry accounting is an incredible and wonderful invention and widely applied in managing business finances. While all that and more, it also has the ability to aid financial subterfuge. Therefore, the art of accounting is based on a high-level of trust. What business doesn’t want accurate, trustworthy, reliable financial data? While we would all agree on that, what often is overlooked is the underlying unit of that accounting—and more precisely money.

Today, truth be told, while some would agree that typewriters are a business tool for museums, our assumption is that the money we account for with business transaction is stable and timeless. Is that truth? Now, the purpose of this is not to say that any central bank currency, including the US dollar is facing forthcoming doom and that you need to prepare for some type of end; or that only using cash is the necessary. Certainly not. This is not investment advice, and this is not business advice. This is to say plainly and simply that no matter your social affinity, that at present, while enjoying the freedoms of this journey we could quickly see the realization that it is actually financial bondage for scores. If you believe the story of Genesis, then you should consider Proverbs 22:7– The rich rule over the poor, and the borrower is slave to the lender. There is money of kings, there is money of gentlemen, and money of peasants, but debt is the money of slaves – paraphrase of sage words from Norm Franz.

Along this unprecedented, extraordinary, and exceptional financial journey where we see RV’s driven for enjoyment that cost more than a decade of prime-year working salaries of a minimum wage earner, we need to appreciate the while world-wide taxation is not a new concept to history of world civilization, central banking certainly is.

I recently read a book about two adventurers who journeyed the globe in approximately 37 days. One of the most memorable facts of that read for me was that of the million-dollar smiles, accounted on the faces of some happy Asians heading home to their families after a good day of work where daily wages would be less than what some American’s spend daily on a cup of coffee.

Perhaps a people who do not know the history of their successes at present, whether family, community, or financial are likely at risk of missing a big key to their future successes.  Likewise as truth has always prevailed in history, we too should continue to believe it will prevail again. Subsequently, do we realize what is financial truth? The reality is that anyone searching for financial truth will realize that being materially subject to “money” risks with perhaps changing tax regulations, increased money printing, or interest rate shifts, we should humbly consider possible expectations if financial truth prevails, and secondly and more concerningly, if we even want it to prevail with freedoms it brings. Yet, if financial truth prevails, will you be in bondage? Any therein is the purpose of this blog.

In closing, the Wisemen knew exactly what journey they had embarked upon, and we should ponder that in our hearts this Christmas Day. Our encouragement to you looking towards the new year is like the angels words to the shepherds — “Fear not!” You too can understand the historical truths of money and its freedom.

With gratitude this Christmas Season, we have for the first 10 readers who email me dsauder@saudercpa.com — a free copy of Money and Liberty

God Bless on your journey ahead.

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. 

2021 Year-End Tax Planning for Individuals

As we near the end of 2021, Congress is still considering a large package of tax changes that could increase taxes in 2022 for wealthier taxpayers while potentially reducing taxes for low to middle-income taxpayers.

Referred to as the Build Back Better Act, the detail of this legislation are still subject to substantial changes as legislators continue to negotiate the terms. It is possible an agreement might not be reached until very late in the year. Some of the tax provisions may be effective as of the enactment date, others could potentially be retroactive, and some might be effective starting in 2022 or later.

In general, tax planning includes accelerating deductions, postponing income, reviewing investment portfolios for possible capital gain or loss realizations, making charitable gifts, and lifetime gifts to family members. However, due to its size, the implications of the Build Back Better Act must be taken into consideration. Unfortunately, it may be enacted too late to act. Therefore, you will benefit from speaking to us now about your situation and year-end plans that might make sense for you within this changing tax landscape.

High-Income Taxpayers

The Build Back Better plan proposes a larger tax burden for individuals and estates and trusts with high income. These proposals include:

• • • a modification to the net investment income tax starting in 2022 that would classify pass through income as investment income subject to the NIIT even if the taxpayer materially participates in the business.
    • an additional tax of five percent that would apply to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $10 million ($5 million for a married taxpayer filing separately, $200,000 for an estate and trust). An additional three percent tax that would apply to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $15 million ($12.5 million for a married taxpayer filing separately, $500,000 for an estate and trust). The surcharge would apply in tax years beginning after 2021.
    • new limits on the favorable tax rules for investment in qualified small business stock. Possibly retroactive to the sale or exchange of qualified small business stock after September 13, 2021, favorable rules will not apply to any taxpayer with adjusted gross income of $400,000 or more, or any estate or trust.
    • wash sale rules may apply to a wider range of investments including foreign currency, cryptocurrency and commodities.

Considering the timing for these tax changes, wealthier taxpayers may want to consider accelerating income rather than the usual postponement of income and may also want to consider postponing deductions rather than the usual acceleration of deductions. In addition, a careful review of portfolio investments may be beneficial.

Other December 2021 tax strategies:

• • • All taxpayers may want to look at year-end charitable contributions to take advantage of the $300 deduction for those claiming the standard deduction or the 100 percent of adjusted gross income limit on those itemizing deductions; both provisions currently expire at the end of 2021
    • With a possible significant increase in IRS funding to enhance audit rates of tax returns, taxpayers may want to focus on making sure they have documentation to support all deductions and credits on their tax returns
    • Owners of pass-through businesses should consider reviewing possible changes to the 20 percent deduction for qualified business income, disallowance of excess business losses, changes to the taxation of carried interests, and a significant package of changes to the taxation of partnerships.
    • There is a proposal to extend residential energy credits in the Build Back Better Act. However, under current law, they are due to expire at the end of 2021. Taxpayers might consider the tax impact for timing installation of energy-efficient exterior windows, doors, skylights, roofs, and insulation, as well as energy efficient heating and air conditioning systems and water heaters to take advantage of the greatest tax savings.
    • 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.

Because of the large scope of the Build Back Better Plan, including retroactive changes to the tax rules, there is no one size fits all for tax planning and any strategy may have unintended consequences if the taxpayer’s situation is not evaluated holistically. Please call our office to schedule an appointment to discuss your tax strategies strategy.