2021 has been another challenging year for many businesses. Covid-19 has caused numerous businesses to rethink their business strategy. Many businesses have had to pivot to new markets to sustain profitability and cash flow. Congress has also had to respond to Covid-19. It made changes to the Tax Cut and Jobs Act for 2020. It also passed The Coronavirus Aid, relief and Economic Security Act (“CARES ACT”) as well as the the American Rescue Plan. Congress is currently negotiating Infrastructure and Budget Reconciliation Legislation. These proposals include tax benefits for individuals as well as enhanced energy credits for individuals and businesses. However, the proposals include many provisions increasing the tax burden for individuals and businesses. The existing Acts contain many tax provisions to help businesses and individuals impacted by Covid-19. Some of these provisions are listed below. As a business owner it is in your best interest to be aware of these changes and how they can help your business and reduce your tax liabilities.
Businesses
Employee Retention Credit
The American Rescue Plan extends the employee retention credit through the end of 2021. The employee retention credit was designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 70% of $10,000 in wages paid per employee, per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021 for businesses that have been financially impacted by COVID-19.
The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans such as the Economic Impact Disaster Loan (“EIDL”). Please note, Section 206 of the Relief Act amended section 2301 of the CARES Act to permit an employer that received a Paycheck Protection Program (“PPP”) loan to be eligible to claim an employee retention credit under section 2301 of the CARES Act by striking section 2301(j) of the CARES Act, effective retroactive to the original effective date of the CARES Act.
Paycheck Protection Program Loans
Effective beginning in 2020 forgiveness of PPP Loans is considered non-taxable income to the business. Additionally, expenses used to qualify for PPP Loan forgiveness are retroactively deductible for taxable years ending after 3/27/20. This is a great deal for businesses impacted by the pandemic.
Paid Sick Leave Credit Extended Through Sept 2021:
The paid sick leave credit is designed to allow business to get a credit for an employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. Those employees are entitled to paid sick leave for up to 10 days (up to 80 hours) at the employee’s regular rate of pay up to $511 per day and $5,110 in total.
The employer can also receive the credit for employees who are unable to work due to caring for someone with Coronavirus or caring for a child because the child’s school or place of care is closed, or the paid childcare provider is unavailable due to the Coronavirus. Those employees are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay or, up to $200 per day and $2,000 in total.
Family Leave Credit Extended Through Sept 2021:
Employees are also entitled to paid family and medical leave equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit. This is a significant benefit to employers allowing them to immediately benefit from this tax incentive.
Eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through Dec. 31, 2020. The refundable credit is applied against certain employment taxes on wages paid to all employees.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Increased Credit for Small Employer Retirement Plan Startup Costs with Automatic Enrollment
The CARES act increased the credit for retirement plan startup costs of employers with 100 or fewer employees, who received at least $5,000 of compensation from their employer for the preceding year. The credit is equal to 50% of the plan startup costs paid during the taxable year. The credit is available for the first three years of the plan and cannot exceed the greater of 1) $500 or 2) the lessor of a) $250 for each employee eligible to participate in the plan or B) $5000. An employer can qualify for a second annual credit of $500 for the three year period if the plan includes an automatic enrollment for employees.
Cash Method of Accounting
C corporations may use the cash method of accounting if their average gross receipts for the prior three years were less than $26 million. This is a great deal for those businesses with slow paying customers, they no longer have to pay income tax on those sales before they receive the cash from their customers.
C Corporation Tax Rate
The C Corporation tax rates remained flat at a rate of 21% for 2021. This includes personal service corporations.
| Taxable Income | Tax Rate 2021 |
|---|---|
| Less than $50,0000 | 21% |
| $50,000 – $75,000 | 21% |
| $75,000 – $10,000,000 | 21% |
| Greater than $10,000,000 | 21% |
Qualified Business Income Deduction
Still in effect for 2021, in the case of a taxpayer other than a C Corporation there shall be a deduction with respect to any qualified trade of business of an amount equal to the lessor of:
- 20% of the taxpayers qualified business income
- The greater of:
a. 50% of the w-2 wages of the qualified business
b. The sum of 25% of the w-2 wages of the qualified business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property
*Please note that the w-2 limitation (2 above) does not apply to any taxpayer whose taxable income for the year does not exceed $329,800 MFJ and $164,900 single. The w-2 limit applies fully for a taxpayer whose taxable income is in excess of the threshold amount by $100,000 MFJ, $50,000 single. Also, note that if your business is a Specified Service Trade or Business (i.e. Health, Law, Accounting, Financial Services) and your taxable income exceeds $429,800 MFJ and $214,900 single, you no longer qualify for the deduction.
Section 179 Expense Limitations and Modifications
The maximum amount a taxpayer can elect to expense under sections 179 is increased from $1,040,000 in 2020 to $1,050,000 in 2021 Furthermore, the deduction limit or phase out began at $2,590,000 in 2020, this limit is increased to $2,620,000 in 2021. The Section 179 limit for SUVs, Trucks, Vans over 6000 pounds GVWR is $26,200. A truck or van that is a qualified non-personal use vehicle is not subject to the annual depreciation limit.
Bonus Depreciation
Taxpayers are required to take and additional first year special depreciation allowance for certain qualified property. This deduction is calculated after taking any Section 179 and before any regular depreciation deduction. This additional depreciation taken on new or used property is held at 100% from 2018 to 2022. This increased deduction also applies to Longer Production Period Property and Certain Aircraft. After 2022, the deduction is reduced 20 percentage points each year until it reaches 0% for qualified property and 20% for Longer Production Period Property and Certain Aircraft in 2027. The additional first year bonus depreciation for vehicles purchased after 9/27/17 remained at $8,000 for 2021.
Qualified Improvement Property
The CARES ACT also made provisions for Qualified Improvement Property (QIP”). QIP is defined as improvement to the interior portion of a commercial building (provided the improvement is not attributable to enlargement of the building, elevators, escalators, or the internal structural framework of the building). QIP now has a 15 year recovery period and if placed in service after 2017 qualifies for 100% Section 168(k) bonus depreciation.
Qualified Opportunity Funds
This new tax provision provides an effective deferral mechanism for short and long-term capital gains from current investments in nearly all asset classes including stocks and other securities. Unlike Section 1031 “like-kind” deferral, qualified opportunity zones will provide: (i) the ability to invest only the gain rather than the entire current investment, (ii) a broader range of investments eligible for the deferral, (iii) a potential basis step-up of 15 percent of the initial deferred amount of investment, and (iv) an opportunity to abate all taxation on capital gains post-investment.
The tax provision allows taxpayers to defer the short term or long-term capital gains tax due upon a sale or disposition of property if the capital gain portion of the sale or disposition is reinvested within 180 days in a “qualified opportunity fund”. A “Qualified Opportunity Zone Fund” is a corporation or partnership that invests at least 90 percent of its assets in qualified opportunity zone property. A Qualified Opportunity Zone is a population census tract that is a low-income community that is designated as a qualified opportunity zone. The governor of each state and the US Treasury Department certify the qualified opportunity zones within a state. In Arizona portions of Phoenix, Scottsdale, Glendale, Tempe and Mesa have been designated as Opportunity Zones.
Limitation of Business Interest Deduction Increased
Effective January 1, 2018, the deduction of business interest will be limited to the sum of:
- Business interest income of the taxpayer for the tax year
- 30% of the adjusted taxable income of the taxpayer for the tax year 2021
- The floor plan financing interest of the taxpayer for the tax year
The amount of any business interest not allowed as a deduction for any taxable year shall be treated as business interest paid or accrued in the succeeding taxable year. There is an exemption from this provision for certain small businesses with average annual gross receipts of less than $25 million for the proceeding 3 tax years.
Limitation of Excess Business Losses of Non-Corporate Taxpayer Limited
Whereas the the TCJA made effective January 1, 2018, any excess business losses of the taxpayer shall not be allowed. Where “excess business loss” means the excess of aggregate deductions attributable to the business of the taxpayer over the sum of: The aggregate business income/gain of the taxpayer, $250,000 single and $500,000 MFJ. Any disallowed excess business losses are treated as a net operating loss (NOL) for the current year for purposes of determining any NOL carryover to subsequent tax years
Research and Development Expenditures
Currently taxpayers may elect to deduct certain expenses for research and development in the current year. Effective after December 31, 2021, research and development expenses will be required to be capitalized and amortized ratably over a 5-year period.
Business Meals and Entertainment Expenses
Effective January 1, 2018, businesses may no longer deduct expenses generally considered to be entertainment, amusement or recreation, membership dues with respect to any club organized for business, pleasure, recreation or other social purpose or a facility used in connection with any of the above. Taxpayers may continue to deduct 50% of the cost of business meals, 100% of business meals at a restaurant, if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.
Individuals
The seven Individual Income Tax Brackets will remain as follows:
Income Tax Brackets for 2021
| 10% Below | Married Filed Jointly | Single |
|---|---|---|
| Beginning of the 12% Bracket | $19,900 | $9,950 |
| Beginning of the 22% Bracket | $81,050 | $40,525 |
| Beginning of the 24% Bracket | $172,750 | $86,375 |
| Beginning of the 32% Bracket | $329,850 | $164,925 |
| Beginning of the 35% Bracket | $418,850 | $209,425 |
| Beginning of the 37% Bracket | $628,300 | $523,600 |
The marriage penalty is removed in every bracket except 37% for 2018 – 2025.
Standard Deduction/Personal Exemption
Effective January 1, 2018 through 2025, the standard deduction and personal exemption will change as follows:
| Type | Amount |
|---|---|
| Standard Deduction (Single) | $12,550 |
| Standard Deduction (MFJ) | $25,100 |
| Personal Exemption | $0 |
Capital Gains and Qualified Dividend Rates for 2021 are as follows:
| Taxable Income (MFJ) | Taxable Income (Single) | Tax Rate |
|---|---|---|
| Less than $80,800 | Less than $40,400 | 0% |
| Less than $501,600 | Less than $250,800 | 15% |
| Greater than $501,600 | Greater than $250,800 | 20% |
Net Investment Income Tax
This rate remains at 3.8% for 2021 and applies to modified AGI above $250,000 MFJ and $125,000 Single. An individual is subject to the net investment income tax on the lessor of net investment income (i.e. gross income from interest, dividends, annuities, royalties, rents, gain on disposition of property) for the year or or modified adjusted gross income for the year exceeding the threshold amount.
Additional Medicare Tax
This rate remains at .9% for 2021 and applies to wages and self employment income in excess of $250,000 MFJ, $125,000 Single.
State and Local Taxes
Effective January 1, 2018, an itemized deduction is allowed up to $10,000 for state and local income and property taxes, prior to this date this deduction was not limited.
Qualified Residence Interest
Effective January 1, 2018 through 2025, the qualified residence interest deduction and home equity indebtedness deduction are limited as follows:
| Type | Amount |
|---|---|
| Acquisition Indebtedness Limit (MFJ) | $750,000 |
| Home Equity Indebtedness Limit (MFJ) | $0 |
Miscellaneous Itemized Deductions
Effective January 1, 2018 through 2025 these deductions are suspended.
Alternative Minimum Tax (“AMT”)
The AMT exemption amount increases from $113, 400 in 2020 to $114,600 in 2021 MFJ, $72,900 in 2020 to $73,600 in 2021 Single. Furthermore, the phase out threshold for the exemption is increased from $1,036,800 in 2020 to $1,047,200 in 2021 MFJ, $518,400 in 2020 to$523,600 in 2021 Single.
Shared Responsibility Payment
Effective January 1, 2018, the shared responsibility payment enacted as part of the Affordable Care Act is reduced from $272 per month (Single), $1,360 per month (family of five), to $0 for both categories.
Child Tax Credit Extended
The American Rescue Plan makes the Child Tax Credit fully refundable for 2021 and extends it through 2025. It also makes 17-year-olds eligible as qualifying children. The act increased the amount of the credit from $2,000 to $3000 per child ($3,600 for children under 6). The credit phases out for taxpayers with incomes over $75,000 single, $150,000 for married taxpayers.
2021 has been another challenging year for many businesses. Covid-19 has caused numerous businesses to rethink their business strategy. Many businesses have had to pivot to new markets to sustain profitability and cash flow. Congress has also had to respond to Covid-19. It made changes to the Tax Cut and Jobs Act for 2020. It also passed The Coronavirus Aid, relief and Economic Security Act (“CARES ACT”) as well as the the American Rescue Plan. Congress is currently negotiating Infrastructure and Budget Reconciliation Legislation. These proposals include tax benefits for individuals as well as enhanced energy credits for individuals and businesses. However, the proposals include many provisions increasing the tax burden for individuals and businesses. The existing Acts contain many tax provisions to help businesses and individuals impacted by Covid-19. As a business owner it is in your best interest to be aware of these changes and how they can help your business and reduce your tax liabilities.
Please let us know if you have questions concerning the 2021 federal tax law changes or any other tax compliance or planning issues, we can be reached at (480) 980-3977!
