Tax Planning Guide
ARE YOU CONFIDENT YOU ARE DOING EVERYTHING TO MINIMIZE TAXES FOR YOUR BUSINESS?
If not, it may be time to work with an experienced CPA and review your current situation.
Planning is the key to successfully and legally reducing tax liability. This Tax Planning Guide provides tips to help minimize your business tax liability, summarizes complex tax regulations, identifies common business deductions, and much more!
CONTENTS
PAYCHECK PROTECTION PROGRAM & YEAR-END TAX PLANNING
PAYCHECK PROTECTION PROGRAM & YEAR-END TAX PLANNING
TAX DEDUCTIONS
CREDITS
BUSINESS STRATEGIES
- COST SEGREGATION STUDIES
- RETIREMENT PLANS
- FRINGE BENEFIT PLANS
- ACCOUNTING METHODS
2021 DUE DATES
PAYCHECK PROTECTION PROGRAM & TAX PLANNING
We recognize your business may be facing decisions you have never had to face, and we are here to help. We are monitoring all bills passed for their impact and will help you navigate through this season of your business.
Congress passed the CARES Act and provided funding for Paycheck Protection Program (PPP) Loans. Companies that have managed to secure financing through PPP are fortunate—but also saddled with a lot of red tape. Business owners and managers should be careful that they adhere strictly to the terms of the program to qualify for loan forgiveness.
The December 2020 stimulus bill clarified that PPP forgiveness is tax-free, and the expenses paid with the loan proceeds are deductible. It also explains that taxpayers will receive an increase to the basis for the amount of the loan, effectively treating the PPP forgiveness exactly as any other tax-exempt income is treated for tax purposes. This provision overrides the IRS’s position that the PPP loans’ expenses were to be non-deductible.
In addition, many have questions on how to account for the funds, expenses, and forgiveness in their accounting records.
PPP FORGIVENESS
There are several factors for consideration, including tax rates and income, as well as implications of loan covenants. Each taxpayer’s situation will be slightly different, and it is important to consider all factors when deciding whether to wait to apply for loan forgiveness.
You may wish to set up a tax planning meeting to determine the implications of the taxability of the loan forgiveness. Please contact a Smith Schafer tax advisor about the options specific to your situation.
THE MOST POPULAR BUSINESS TAX CREDITS
Tax credits are extremely valuable breaks for taxpayers. Credits lead to a greater reduction in tax than deductions because they are directly applied to your tax bill in a dollar-for-dollar manner.
2021 Employee Retention Credit
The latest stimulus bill that passed in December 2020 provides for an expansion of the employee retention credit. Employers are eligible to receive a credit of 70% of wages paid during a government-mandated shut down or in any quarter in which the entity experienced a 20% or greater decline in gross receipts over the same quarter in 2019. Employers with greater than 500 full-time equivalents are eligible only to the extent that they paid employees not to work. Entities with 500 or fewer full-time equivalents are not subject to this requirement. The credit is capped at $10,000 in wages (or a $7,000 credit) per employee per quarter for 2021.
Proper planning and analysis will help maximize the employee retention credit. Please reach out to a Smith Schafer advisor to help with this analysis.
Work Opportunity Tax Credit
Hiring people from targeted categories and employing them for at least 120 hours may qualify your company for the Work Opportunity Tax Credit. The new hire must fall into one of the following groups:
- Veterans
- Long-term unemployed
- Food stamp recipient
- Summer youth
- TANF (Temporary Assistance for Needy Families) recipients
- Designated community residents
- Vocational rehabilitation referral
- Ex-felons
- Supplemental security income recipients
Depending on which target group the individual belongs to, the maximum credit per new hire may range from $1,200 to $9,600.
RESEARCH & DEVELOPMENT (R&D) TAX CREDIT
The federal R&D tax credit was first introduced in 1981. The R&D tax credit is an incentive for businesses to invest in research and development activities to increase growth and competitiveness. Businesses may be able to take credit up to 13% of eligible spending for new and improved products and processes.
Qualified research must meet the following criteria:
- New or improved products, processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
What expenses can be included to calculate the credit? R&D expenses include:
- Employee wages
- Cost of supplies
- Cost of testing
- Contract research expenses
- Costs associated with developing a patent
Taxpayers need to show documentation supporting the expenses. They must be associated with activity in science, technology and experimentation developing a new or improved business component. The federal credit may be carried forward for 20 years or have the potential to offset payroll tax.
TIP CREDIT
Businesses may be able to claim a credit for social security and Medicare taxes paid or incurred by an employer on certain employees’ tips. This credit is part of the general business credit.
You may claim this credit if you meet both of the following conditions:
- You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption if tipping of employees for delivering or serving food or beverages is customary.
- During the tax year, you paid or incurred employer social security and Medicare taxes on those tips.
Generally, the credit equals the amount of employer social security and Medicare taxes (7.65%) paid or incurred by the employer on tips received by the employee.
PAYROLL TAX CREDIT
This credit was created by the CARES Act to support employers whose operations had been fully or partially suspended because of COVID-19. Other eligible businesses are those whose gross receipts dropped more than 50% compared to the same quarter in the previous year. They are then eligible until gross receipts exceed the 80% of gross receipts test for the previous year’s quarter. This credit equals 50% of compensation and health care benefits, paid to eligible employees after March 12, 2020, for each employee up to $10,000. This credit is applied against certain employment taxes. Taxpayers are not eligible for this credit if they took advantage of the Paycheck Protection Program (PPP) loan. In most instances, the PPP was a greater advantage than the payroll tax credit.
PAID LEAVE CREDIT
Federal payroll tax credits for qualified sick leave and emergency family leave wages are made available to employers through The Families First Coronavirus Response Act (FFCRA). This act requires employers with fewer than 500 employees to provide paid leave for employees taking leave due to certain COVID-19 circumstances. Up to $511 per day for leave taken for the employee’s own illness or quarantine and $200 for leaves taken to care for others. These credits are taken on the business’s quarterly payroll tax returns and are available for employees who have tested positive for COVID-19 or are in quarantine. The emergency family medical leave is available for employees who are caring for a child whose daycare or school is closed.
PAYROLL TAX DEFERRAL
Two separate orders have allowed delayment in paying Social Security payroll taxes. The first was the CARES Act which enabled employers to delay payment of their share of Social Security for up to two years, with repayment due by Dec. 31, 2022. Additionally, the president’s memorandum on August 8, 2020 offered deferral of the employee’s share of Social Security taxes. In most instances, we are advising against utilizing the payroll tax deferral because it is a very short deferral and is burdensome on the employer. Contact your tax advisor for the latest information.
NET OPERATING LOSSES (NOL)
The CARES Act allows taxpayers to carry back NOLs arising in 2018-2020 to the previous five years to offset taxable income. In addition, the CARES Act allows taxpayers to potentially claim an NOL deduction equal to 100% of taxable income in the prior year. This changes the tax reforms initial limitation of 80% of taxable income. The 80% limitation resumes in 2021.
CHARITABLE CONTRIBUTIONS
Modification of limitations on charitable contributions.
Cash contributions to qualified charities are allowed up to 100% of AGI for the 2021 tax year.
THE MOST POPULAR BUSINESS TAX DEDUCTIONS
Tax reform reduced and eliminated several deductions so for many businesses, deductions are not as valuable as they once were. Tax credits generally provide greater savings because deductions do not produce dollar-for-dollar reductions.
QUALIFIED BUSINESS INCOME DEDUCTION
The Qualified Business Income Deduction (QBI or 199A Deduction), in certain situations, may provide up to 20% tax deduction on qualified business income from eligible partnerships, S corporations, and sole proprietorships. For taxpayers with taxable income exceeding $326,600 for a married couple filing a joint return, or $163,300 for all other taxpayers, the deduction is subject to limitations. This applies to new or used expenditures.
These limitations include:
- Whether the business is classified as a service trade or business.
- Taxpayer’s taxable income.
- The amount of W-2 Wages of the business.
- Unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
DEPRECIATION DEDUCTIONS
Section 179 In 2020, businesses can deduct up to $1.04 million of cost of qualifying property placed in service during the given tax year. In addition, as a business owner, you may purchase up to $2.59 million in business property qualifying for the Section 179 deduction each year before the benefit is phased out. Limits are indexed for inflation.
Minnesota taxpayers can take advantage of the full Section 179 deduction and may be able to amend returns for tax years 2017-2020 if they took 179 on assets that were a part of a like kind exchange under code section 1031.
Example: ABC Corp. spends $400,000 on equipment and off-the-shelf computer software equipment in 2020. The business can deduct $400,000 this year on those purchases. To qualify for this Section 179 tax treatment in 2020, the equipment or software must be purchased and placed into service by December 31.
Bonus Depreciation Tax Reform now allows businesses to fully expense certain capital expenditures instead of depreciating them over several years.
Examples of eligible expenses are:
- Office furniture
- Equipment
- Machinery
- Computers
- Software
These expenditures may be fully expensed starting with business assets placed in service after September 27, 2017. Bonus depreciation will begin phasing out for assets placed into service after December 31, 2022. This immediate tax benefit is likely to encourage more capital spending.
Qualified Improvement Property eligible for depreciation
Qualified Improvement Property (QIP) is now a 15-year, bonus depreciation eligible property after the CARES Act provided a technical correction from Tax Reform in December 2017. QIP is a tax classification of assets generally including interior, non-structural improvements to nonresidential buildings placed in service after the buildings were initially put into use.
Vehicle Depreciation
Passenger/Luxury Automobiles
Passenger/Luxury vehicles are defined as four-wheeled, used primarily for street use and have gross vehicle weight (GVWR) of 6,000 pounds or less. Trucks and vans not qualifying as passenger or “luxury” automobiles are not subject to limitations on regular or bonus depreciation. Trucks and vans with GVWR over 6,000 pounds but not over 14,000 pounds are limited to $25,000 of Section 179 expense. The exception to this Section 179 expense rule for trucks and vans is there is no limitation if the vehicle has a bed length of 6 feet or more.
| Year 1 | Year 2 | Year 3 | Year 4 | |
Bonus depreciation limits for passenger/luxury vehicles acquired and placed in service during 2020 | $18,100 | $16,100 | $9,700 | $5,760 |
Regular depreciation limits for passenger/luxury vehicles acquired and placed in service during 2020 | $10,100 | $16,100 | $9,700 | $5,760 |
Note: Truck, SUV or Vehicles over 6,000 pounds are not subject to the Luxury Auto depreciation limits. The vehicle is eligible for 100% bonus depreciation.
MEALS & ENTERTAINMENT DEDUCTION
Business owners may deduct 50% of food and beverage related to operating a trade or business, with a couple conditions:
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer is present when the food or beverages are furnished.
Expenses related to entertainment, amusement, or recreation no longer fall under the 50% deduction. The IRS will not allow the entertainment disallowance rule to be circumvented through inflation of food and beverage costs.
Example: If a business owner treats a current or potential business client, consultant, or other professional contact to a suite at a sporting event, such as a Vikings game, the food and beverage provided during this entertainment activity is 50% deductible. The cost of the food and beverage must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The tickets or suite is not deductible.
Note: Expenses for business meals are fully deductible (rather than limited to 50%) if the expense is paid to a restaurant.
BUSINESS STRATEGIES
Build and preserve your business value with tax-smart planning.
These strategies can help you engage in proactive planning and help grow your businesses.
COST SEGREGATION STUDY
Cost segregation studies identify costs related to real property that can be reallocated to a short-life deprecation schedule. These studies are one of the most valuable tax saving strategies available for commercial real estate owners, leaseholders and others.
Cost segregation studies must be engineering-based, typically involving professional engineers to review all the costs associated with the building or building improvement along with a CPA to provide itemized details for tax purposes.
The study examines a wide range of building components, such as:
- Electrical installations
- Plumbing
- Mechanical components
- HVAC
- Finishes
It also involves a physical inspection of the property, analysis of architectural and engineering drawings and review of cost data, including the contractor’s application of payments, material components, change orders, owner-incurred costs, and indirect disbursements. As a result of a cost segregation study, a business owner can depreciate property over the shortest permissible period of time.
Example: The study may identify electrical or plumbing costs related to the operation of machinery and equipment, which is generally depreciated over five years vs. 39 years for commercial property. This reallocation of cost increases cash flow by reducing the overall tax burden. The tax savings created by depreciating more assets as personal property usually more than make up the expenses paid to perform the study.
In a typical cost segregation study, between 15% and 45% of a building’s costs can be reclassified to shorter-life assets, depending on the type of facility. For a $1 million project, this can equal between $30,000 and $90,000 in increased cash flow. This allows further investment or even quicker repayment of the loan on the building
RETIREMENT PLANS
Have you procrastinated in setting up a tax-advantaged retirement plan for your business? If so, you are paying income taxes that could easily be avoided and putting your retirement financial situation at risk. However, you can set things right by taking action. That way, you will be positioned for tax savings now and in the future.
Various plan options are available for businesses to establish depending on their size and makeup. Options include:
- SEP
- SIMPLE
- 401k
- Defined benefit cash balance plans
Example: You could implement a safe harbor 401(k) plan for your business. This type of plan requires the company to contribute to employees’ savings accounts. These contributions by the business are completely tax deductible. In addition, a safe harbor 401(k) plan automatically passes annual compliance testing, which will allow you as an owner to maximize your contributions to the plan.
FRINGE BENEFIT PLANS
The right employee benefits allow you to maximize your tax savings, while also benefiting your business and employees.
Below are common tax-exempt benefits you could offer to your employees:
- Transportation benefits
- Dependent care assistance
- Educational assistance
- Health Benefits
- Long-term care insurance
- Disability insurance
- Group term life insurance
ACCOUNTING METHODS
Many growing businesses struggle to create well-tuned accounting processes, especially as systems need to change to support increased activity.
There are two principal options for accounting for revenue and expenses:
- the cash method
- the accrual method
Note: Businesses with average annual gross receipts of $26 million or less in the three previous years can choose either cash or accrual method of accounting. Businesses above average annual gross receipts of $26 million are required to report under the accrual method of accounting.
The cash method of accounting is exactly as it sounds – revenue is recorded when cash is received, and expenses are recorded when cash is spent. This is the simplest accounting method. However, it does not always give a complete and accurate picture of your business operations.
Under the accrual method of accounting, revenue is recognized when it is earned, regardless of when the cash is received and expenses are accrued even if not yet paid. The accrual method of accounting provides a more complete and accurate picture of your business operations and matches the expenses to the same period as the revenue.
TIP:
Accelerate or delay income and expense.
Taxpayers who use the cash method of accounting instead of the accrual method should consider delaying year-end billing, so payments are not received until the next tax year. The same goes for expenses; taxpayers should prepay items prior to the end of the tax year to increase expenses and offset taxable income or delay paying until the next tax year.
2021 Business Due Dates
Stay on top of upcoming due dates with the outline below.
Form W-2, 1099-NEC & 109-MISC | FEBRUARY 1 |
Form 1094-C/1095-C (paper filing with the IRS) | MARCH 2 |
Form 1065 – Partnerships | MARCH 15 |
Form 1041 – Trusts and Estates | APRIL 15 |
Form 1040 – Individuals | MAY 17 |
Second-quarter Estimated Tax Payments | JUNE 15 |
Form 5500 series – Employee Benefit Plan | JULY 31 |
Form 1065 Extended Return | SEPTEMBER 15 |
Form 1041 – Trusts & Estates Extended Return | SEPTEMBER 30 |
Form 1120 – C Corporation Extended Return | OCTOBER 15 |
Tax Planning | NOVEMBER 1 |
Form 990 series – Tax Exempt Organization Extended Return | NOVEMBER 15 |
FISCAL YEAR FILERS
- Partnership and S Corporation tax returns will be due the 15th day of the third month after the end of their fiscal tax year.
- C Corporation tax returns will be due the 15th day of the fourth month after the end of their fiscal tax year.
- Employee Benefit Plan tax returns are due the last day of the seventh month after the plan year ends.
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The contents of this publication do not necessarily reflect the position or opinion of Smith Schafer & Associates. This publication is designed to provide accurate and authoritative information on the subject covered. This information contained herein in general in nature and is not intended and should not be construed as legal, accounting or tax advice provided by Smith Schafer & Associates to the user. The user is cautioned this material may not be applicable or suitable for the user’s specific circumstances or needs and may require consideration of non-tax and other tax factors if any action is to be contemplated. The user should contact his or her Smith Schafer & Associate professional prior to taking any action based upon this information. Smith Schafer & Associates assumes no obligation to inform the user of any changes in tax laws or other factors affecting the information contained here.