Tax season is months away, but businesses should still consider some moves before year-end that could impact their tax outcome for the 2021 filing season.
The corporate tax rate appears to remain unchanged for now after an earlier proposal by President Joe Biden to raise it from 21% to 26.5% failed to gain enough support, but certain companies including S corporations could see an additional 3.8% tax on income under a proposed expansion of the Net Investment Income Tax.
And since policies can still change before year-end, "businesses need to be nimble in their year-end strategies because we may have last-minute changes in Washington," says Barbara Weltman, a Vero Beach, Florida-based small business tax specialist and author of J.K. Lasser’s Small Business Taxes 2022.
But for now, they may fare better than expected with the corporate tax rate appearing to remain unchanged at 21% and the top marginal income tax rate not expected to increase from 37% to 39.6% next year as Biden originally proposed, Weltman says.
Still, certain business owners may face an added 3.8% tax due to the proposed expansion of the Net Investment Income Tax (NIIT) in the Build Back Better legislation. It would impact those with adjusted gross income greater than $400,000 for single filers and greater than $500,000 for joint filers effective tax years beginning after Dec. 31, 2021, she says.
Among changes, it would subject all pass-through income to the tax, not just passive income such as interest income and capital gains, she says.
Up to now, business owners of pass-through entities such as S-corporations and partnerships who were active participants in the daily operations of the business as opposed to silent partners were not subject to this tax generally, Weltman says.
Given that, business owners falling into those income categories may want to move more income into 2021 since the tax wouldn’t apply to this year’s income for pass-through entities — or maybe defer certain expenses to the following year to have additional write-offs, says Michael Ceschini, managing member of Ceschini CPAs in Miller Place.
Separately, for businesses struggling with cash flow this year that haven’t yet claimed the Employee Retention Credit created by the CARES Act but qualify for it, they should consider taking it, he says. It’s a refund for those businesses that suffered a full or partial shutdown due to COVID, but retained employees, or saw a certain decline in gross receipts. See https://tinyurl.com/xn5b2hey
Keep in mind it was set to sunset year-end, but lawmakers are looking to speed up its expiration to Sept. 30, 2021 as per the Infrastructure Investment and Jobs Act, Ceschini says. But the credit can be claimed retroactively in 2021 on the first three quarters of the year.
Another important item to consider during 2021 tax planning is the permanent limitation on the use of excess business losses, says Joseph Molloy, a tax partner in the Uniondale office of Anchin, an accounting and advisory firm.
The EBL limitation was created in the Trump-era Tax Cuts and Jobs Act and limited the amount of net pass-through losses that could be deducted to $500,000 for joint filers for tax years beginning after Dec. 31, 2017, he says. The CARES Act retroactively delayed the EBL limitation to start with tax years beginning after December 31, 2020, Molloy says. For 2021, the limitation is in effect and should be incorporated in year-end planning, he says.
Also individuals may want to consider converting their traditional 401(k) to a Roth IRA before year-end, says Charles Massimo, senior vice president of Wealth Enhancement Group, an investment advisory firm in Deer Park. It offers certain tax advantages, he says, and can be a hedge against higher future rates.
For example, with a Roth plan you’ll pay taxes upfront on the money you put into the account, as opposed to a traditional 401(k) where you're taxed when you withdraw retirement funds. Any investment earnings later on would be tax- free, says Massimo. Another advantage is when your children inherit your retirement plan it’s tax-free to them as well, Massimo says.
With talk in Washington of possible changes that would eliminate converting a 401 (k) to a Roth IRA for certain income levels, individuals may want to act sooner than later, he says.
In a September survey of nearly 2,000 businesses by CBIZ, a provider of financial, insurance and advisory services, 31% of respondents indicated tax policy changes were a top concern.