Tax Planning Guide

Business Structure

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.

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.

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.

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 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.

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.

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:

1. the cash method
2. 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.

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.

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.