President Biden’s proposed reconciliation bill, better known as the “Build Back Better” plan, is still being debated by our legislators and proposed tax provisions are being revised daily. This uncertainty makes tax planning difficult and may leave little time for year-end moves; however, there are some items already in place that should be considered for 2021 and 2022.
Employee Retention Credit (ERC)
The ERC retroactively ends on September 30, 2021. Employers should review their records to determine if they are eligible to claim this credit. Consideration should be given to amending prior payroll tax returns. If claimed, the ERC reduces compensation deductions for tax purposes by the amount of the credit so any amendment to prior year payroll tax returns to claim the credit may result in an amendment to income tax returns. The amount of the credit may be well worth the extra work.
Pass-Through Entity Tax
Several states have enacted legislation that allows a workaround of the $10,000 limit on state and local income taxes. These work arounds allow pass-through entities (PTEs) to pay and deduct state income taxes at the entity level instead of the individual level. Maryland is one of the states that allows a work around. The tax must be paid in 2021 to take advantage of this deduction.
Net Operating Loss Carryforward
Beginning in 2021 and for all subsequent tax years, federal net operating losses (NOLs) generated can only be carried forward. In addition, NOLs generated may only offset 80% of current year taxable income. If it appears that you may have a loss in 2021 you may want to consider accelerating income or deferring expenses to offset or minimize this loss.
Retirement Savings Plans
If you have not already established a retirement plan you may want to consider taking advantage of this benefit. Some plans must be established and funded by December 31, 2021, whereas others may be established and funded through the extended due date of the business tax return. Depending on your tax bracket this can provide significant tax savings by reducing taxable income.
Business Meals Deduction
Legislation passed in early 2021 included a provision allowing a 100% deduction for meals and beverages provided by a restaurant during 2021 and 2022. A “restaurant” is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the restaurant’s premises. A restaurant does not include a business that primarily sells prepackaged food or beverages, not for immediate consumption, such as a grocery store, specialty food store, liquor store, drugstore, convenience store, newsstand, vending machine, or kiosk. Businesses should review their chart of accounts and general ledger to ensure that expenses qualifying for the 100% meals deduction are readily identifiable.
Research & Development Tax Credit (R&D)
The R&D credit remains in place for 2021; however, there will be significant changes in 2022. Domestic research and experimentation expenses incurred after December 31, 2021 must be amortized over five years and foreign research expenses must be amortized over 15 years. Businesses should consider maximizing 2021 deductions.
Nexus caused byTelecommuting Workers
As a result of the pandemic, many companies have changed their work from home policies and are allowing employees to telecommute. Employees working from home may create nexus in other states and require new reporting and payment obligations for both income and employment taxes. Companies should review the location of their employees and review the rules of each state.
Please contact us if you would like to discuss year end planning. We will provide updates if any legislation is passed that affects businesses.