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 understanding and minimizing your 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!
New for 2021
- COST SEGREGATION STUDIES
- RETIREMENT PLANS
- FRINGE BENEFIT PLANS
- ACCOUNTING METHODS
2022 DUE DATES
NEW FOR MN TAXPAYERS IN 2021: SALT CAP WORKAROUND
Beginning in 2021, owners of passthrough entities (S Corporations and partnerships) can pay MN state income tax through their S Corporation or partnership and have the S corporation or partnership take the deduction. Owners will then receive a credit when filing their MN tax return.
Currently, individuals are limited to a maximum of a $10,000 deduction for state and local taxes on their individual returns, Schedule A. The SALT Cap Workaround allows the owners of passthrough entities to deduct the taxes paid to the state of MN instead of losing that deduction. Additionally, the deduction is not a part of itemized deductions, but is an ordinary business expense.
Many other states have adopted similar provisions, including Wisconsin. The benefit to planning is not only for MN entities. Additionally, cash method taxpayers need to pay in the MN tax before year-end to receive the benefit of this deduction.
*Note that MN’s law is written such that this deduction only applies while there is a federal cap on the State and Local Tax Deduction.
- S Corporation has net income before tax of $100,000.
- S Corporation elects to pay MN passthrough tax of $9,850 (9.85%)
- S Corp federal taxable income reduced to $90,150
- Federal tax savings between $1,950 and $3,650 depending on owner’s overall federal rate.
- Entity owners receive fully refundable credit on MN individual return of $9,850. Effectively making it a zero impact on the state return.
C Corporations are subject to a flat 21% rate while S Corporations and Partnerships pass their income through to the owners, ultimately taxed at the owner’s rate. However, the C Corporations are subject to “double taxation” and the pass-through entities are not. As tax laws change, it may be advantageous to review entity structure to make sure your business is using the most tax advantageous approach.
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.
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.
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.
Solar Investment Tax Credit
A 26% tax credit is available for solar projects completed in 2021. Taxpayers can invest in projects on their own premises or can invest in solar as a separate investment to receive the benefit from the solar investment. Credits are available through investments in “Community Solar Gardens” or in other tax only investment vehicles.
PAID LEAVE CREDIT
A federal payroll tax credit for qualified sick and family leave wages is made available to employers through The Families First Coronavirus Response Act. This provision was available through the end of third quarter 2021 and can be claimed on an amended payroll tax return if it was missed initially. The 2021 changes allowed employers with fewer than 500 employees to provide paid leave for employees taking leave due to certain COVID-19 circumstances. Max credits provided are $511 per day for leave taken for the employee’s own illness or quarantine. The credits were also available for employees taking time off to receive the vaccine or time off related to vaccine side effects. Owners are eligible for this credit for their own wages.
2021 Employee Retention Credit
A federal payroll tax credit is available for businesses that were impacted by COVID-19. The credit is up to $7,000 per employee, per quarter for the first three quarters of 2021. A maximum credit of $21,000 per employee for 2021 is available for businesses that qualify. In order to qualify the business must have been impacted by COVID-19 in either of the following ways.
- The business was impacted by a governmental order that either completely or partially shut down their operations. Businesses that were subjected to capacity restrictions may qualify under certain circumstances. In Minnesota, many businesses were subject to capacity restrictions through May 28, 2021.
- The business saw a quarter-over-quarter drop in revenue in 2021 of 20% compared to the same quarter in 2019. Under this analysis, each quarter stands alone for comparison. Businesses who are not down 20% for the year may still qualify if the quarterly revenue is down. Additionally, businesses qualifying under this provision receive the credit until the END of the quarter that no longer qualifies. Meaning, if a business qualifies in 1st quarter, the business automatically qualifies for 2nd quarter.
This credit was also available in 2020, with slightly different rules. Businesses can still amend 2020 payroll tax returns if they qualify under the 2020 rules.
Businesses that received the second round PPP cannot use the exact same wages for both ERC and PPP, so it is important to run the analysis to maximize both of these provisions.
THE MOST POPULAR BUSINESS TAX DEDUCTIONS
QUALIFIED BUSINESS INCOME DEDUCTION
Most passthrough entities are eligible for the Qualified Business Income Deduction, also called a Section 199A deduction or QBI deduction. According to the IRS, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted.”
This deduction, in certain situations, may provide up to 20% tax deduction on qualified business income for eligible partnerships, S corporations and sole proprietorships. For taxpayers with taxable income exceeding $329,800 for a married couple filing a joint return, or $164,900 for all other taxpayers, the deduction is subject to limitations.
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.
Section 179 In 2021, businesses can deduct up to $1.05 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 $2.62 million in business property qualifying for the Section 179 deduction each year before the benefit is phased out. Limits are indexed for inflation.
Example:ABC Corp. spends $400,000 on equipment and off-the-shelf computer software equipment in 2021. The business can deduct $400,000 this year on those purchases. To qualify for this Section 179 tax treatment in 2021, the equipment or software must be purchased and placed into service by December 31.
Bonus Depreciation Businesses may fully expense certain capital expenditures instead of depreciating them over several years.
Examples of eligible expenses are:
- Office furniture
- Qualified Improvement Property
- Land Improvements and Parking Lots
Bonus depreciation will begin phasing out for assets placed into service after December 31, 2022.
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 but can take bonus depreciation up to the entire cost of the vehicle. 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 2021
Regular depreciation limits for passenger/luxury vehicles acquired and placed in service during 2021
MEALS & ENTERTAINMENT DEDUCTION
As part of the Consolidated Appropriations Act in 2021, certain business meals are fully deductible for 2021 and 2022. Previously, business owners could deduct 50% of food and beverage related to operating a trade or business. That limit has been removed for food and beverages if they are purchased from a restaurant in 2021 and 2022.
Additionally, expenses related to business meetings for employees, stockholders, agents or directors are fully deductible. Therefore, entertainment expenses related to meetings, activities, or events for the benefit of employees are fully deductible. This may include events such as shareholder meetings, holiday parties and summer outings. As long as these events remain as company only functions, these rules should apply.
As a result of these two provisions, most food and beverage expenses for businesses will be fully deductible for 2021 and 2022.
Other expenses related to entertainment, amusement, or recreation remain nondeductible. Internal Revenue Service (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 deductible. The cost of the food and beverage is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
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
- Mechanical components
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. This reallocation of cost increases cash flow by reducing the overall tax burden.
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.
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 $25 million or less in the three previous years can choose either cash or accrual method of accounting. Businesses above average annual gross receipts of $25 million are generally 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.
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.
Various plan options are available for businesses to establish depending on their size and makeup. The 2021 contribution limits for various plans are:
Defined Contribution Plans
- SEP – $58,000
- SIMPLE – $13,500, plus catch up contributions of $3,000 for participants over age 50.
- 401k – $19,500, plus catch up contributions of $6,500 for participants over age 50. Employer contributions for 401(k) plans can be made for a total contribution up to $58,000 per employee (64,500 including catch-up contributions).
- Defined benefit cash balance plans – Actuarial calculation, can be significantly higher than other 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’ retirement 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
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.
Recent tax proposals have highlighted the need for business owners to think about transition planning and business valuation. Even if owners have no immediate desire to transition the business, understanding the current tax environment is important for long-term planning.
In family owned businesses, long term transition planning should be coupled with estate planning in order to maintain a successful business while saving taxes.
Minnesota Tax Law Changes
MN tax code changes were signed into law on July 1, 2021. Among those changes were federal conformity related to non-taxability of Paycheck Protection Program (PPP) Loans and EIDL advance payments. An amended MN return may be required for taxpayers who included those amounts as income on their 2020 MN state income tax returns. Generally, if the only add-back to the MN return was the PPP the MN Dept of Revenue has indicated that they will process those refunds automatically. However, if there are items beyond the PPP it may require an amended return. The Dept of Revenue sent out letters to many taxpayers on this issue. If you received a letter, please make sure your tax preparer receives a copy of that letter because an amended return will be required.
2022 Business Due Dates
Stay on top of upcoming due dates with the outline below.
Form W-2 & certain 1099-Misc (electronic or mail)
Form 1099 – Misc paper filing deadline for non-box 7 amounts
Form 1065 – Partnerships
Form 1040 – Individuals
Form 990 series – Tax Exempt Organizations
Form 5500 series – Employee Benefit Plan
Form 1065 Extended Return
Form 1041 Extended Return
Form 1120 – Extended Return
Form 990 series – Tax Exempt Organization Extended Return
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.
Contact us today to learn tax saving strategies that best fit your situation.
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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.