While the next tax season might still be months away, Christmas holidays and the new year will be knocking on your doorstep before you know it. That's what makes it a great time to start thinking about how you can reduce your tax burden in 2021.
Once you've planned ahead and given your taxable business income the attention it needs, it's easy to take advantage of timely tax benefits and strategically manage your revenue and costs, utilizing your business' tax deductions as an incentive to reward both you and your staff for the upcoming year.
Opportunities for Businesses & Business Owners
1. Taking Advantage of Additional Deductions
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (“QBI”). For 2021, the QBI deduction phases out if taxable income exceeds $329,800 for a married couple filing jointly, and $164,900 for singles and heads of household.
This deduction can be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.
Therefore, taxpayers may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2021. Depending on their business model, taxpayers may also be able to increase the new deduction by increasing W-2 wages before year-end. The rules for this can be quite complex, so make sure to consult a tax adviser first before proceeding.
2. Qualify for Liberalized Business Property Expenses
Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax year 2021, the expensing limit is $1,050,000, and the investment ceiling limit is $2,620,000.
Generally, expensing is available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property (this generally refers to any interior improvement to a building's interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
The generous dollar ceilings that apply this year means that many small and medium-sized businesses that make timely purchases will be able to currently deduct most, if not all, their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year.
The fact that the expensing deduction may be claimed in full(if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2021, rather than at the beginning of 2022, can result in a full expensing deduction for 2021.
3. Claim Your Depreciation Deductions
Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year. The 100% write-off is permitted without any proration based on the length of time an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2021.
4. Accelerate Your Income
Any small to medium-sized corporations that anticipate a small net operating loss (NOL) for 2021 (and substantial net income in 2022) may find it worthwhile to accelerate just enough of its 2022 income—or to defer just enough of its 2021 deductions—to create a small amount of net income for 2021.
This will permit the corporation to base its 2022 estimated tax installments on the relatively small amount of income shown on its 2021 return, rather than having to pay estimated taxes based on 100% of its much larger 2022 taxable income.
Tax preparation can be difficult, but it doesn't have to be a monster at the back of your mind. If you’re interested in learning more about your financial health and how it may affect your taxes in the future, you can contact CPA Solutions for a free 30-minute consultation with one of our fully-qualified CPA experts today.
If you’re interested in reading more about tax planning strategies before the end of the year for individual taxpayers, you can click here.