In light of the pandemic, the rules and programs governing income taxes for businesses have changed numerous times over the last two years, which has caused confusion and headaches for more than a few business owners. And while many of the pandemic-inspired programs and tax breaks have already ended or will end soon, a few of these programs still stand to impact your taxes in 2021.
The good news is that even though many of these programs are ending, the impact on the overall taxes paid by most small businesses is not expected to be all that significant. Moreover, in some cases, business owners can still apply retroactively for certain pandemic-related benefits they might have missed out on when the tax breaks were first offered.
With this in mind, here we'll cover a few of the tax breaks left over from the pandemic-inspired programs that are still available to businesses in 2021. We'll also outline some of the most valuable deductions and credits that are available to tax savvy business owners every year.
Although the optimal time for tax planning is typically before the end of the year, there are still a number of ways you can reduce your company's 2021 tax bill right up to this year's filing deadline, which is April 18th for most taxpayers. While there are dozens of potential tax breaks you may qualify for, here are six last-minute moves you can make to save on your company's 2021 tax return.
1. The Employee Retention Credit Is Still Available
First started under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, the Employee Retention Credit (ERC) is a fully refundable tax credit that was created to encourage businesses to keep employees on their payroll. The ERC has gone through multiple changes over the last two years, causing confusion among many business owners, which is one reason many companies didn't apply for it.
However, the ERC can be extremely valuable, and while the program ended for most companies on Sept. 30, 2021, businesses may be able to retroactively claim the ERC. In order to qualify for the latest version of the ERC, a business must have experienced one of the following two circumstances:
1) Gross receipts declined more than 50% in any quarter of 2020 compared to the same quarter of 2019 or declined more than 20% in any quarter of 2021 compared to the same quarter of 2019; or
2) The company had to fully or partially suspend operations due to a government order related to COVID-19.
For companies who qualify, the expanded ERC comes with the following conditions:
- Can be applied retroactively to 2020.
- Can be claimed by Paycheck Protection Program (PPP) borrowers, as long as the PPP proceeds and the ERC covered different expenses.
Can offset employment taxes equal to 50% of qualified wages (including employer paid health plan expenses) paid between March 13, 2020 and December 31, 2020 or 70% of qualified wages paid between January 1, 2021, and September 30, 2021.
- Has a maximum credit of $5,000 per employee per year for 2020 or $7,000 per employee per quarter for 2021.
Companies with fewer than 500 employees may also be able to claim fully refundable tax credits to cover wages paid to employees who took paid sick or family leave related to COVID-19 from January 1, 2021 through September 30, 2021.
Although the ERC ended for most businesses on Sept 30, 2021, some new companies, known as “Recovery Startup Businesses” (RSB) can claim the ERC for the third and fourth quarters of 2021. To qualify as an RSB, a company must meet each of the following conditions:
- Started operations on or after Feb. 15, 2020;
- Maintains average annual gross receipts that do not exceed $1 million;
- Employs one or more employees (other than 50% owners); and
- Does not otherwise qualify for the ERC because the business' operations were not fully or partially suspended due to government orders, and it did not experience a decline in gross receipts.
Businesses that want to apply for the ERC retroactively will need to amend prior years' tax returns to adjust their payroll expenses. And even if you've already filed your taxes for 2021, you still have time to claim the credit. In fact, businesses have up to three years from the program's end on Sept. 30, 2021 to determine if wages they paid after March 12, 2020 through the end of the program are eligible.
For more information, visit the ERC FAQs on the IRS website. That said, because the ERC is so complex, you should consult with us, your local Family Business Lawyer™ or your CPA to gain clarification on the program and support you with your application to ensure your company gets the maximum benefit of the tax credit.
2. Forgiven Paycheck Protection Program (PPP) Loans Aren't Taxable—At Least At The Federal Level
Forgiven Paycheck Protection Program (PPP) loans aren't considered taxable income by the IRS, so they won't affect your 2021 federal income taxes. Additionally, you can deduct eligible business expenses you paid with PPP funds on your federal tax return.
That said, not all states have adopted the federal rules on how PPP loans are taxed, so you should consult with us or your CPA to determine our state's law on the PPP's taxability.
3. Deduct 100% Of Business Meals From Restaurants
To spur growth in the hard-hit restaurant industry, a provision in the Consolidated Appropriations Act (CAA) passed in December 2020 makes the cost of business-related meals (food and beverages) served by a restaurant 100% deductible on your federal income taxes. As long it's from a restaurant, meals served via takeout and delivery qualify too—you don't have to actually eat on the premises.
This tax break is only for 2021 and 2022. Previously, deductions for business meals at restaurants were limited to 50%.
4. Increased 179 Deductions For Equipment and Vehicle Purchases
If you purchased new or used business equipment in 2021, you could qualify for a deduction of up to $1.05 million (up from $1.04 million in 2020). The deduction is available under Section 179, which allows you to write off the entire amount you pay for qualified business equipment in a single year, rather than depreciating it over multiple years.
Most business property, such as office furniture, computers, software, machinery, and office equipment, will qualify. The deduction can also be applied to SUVs, pickups, vans, and other vehicles weighing more than 6,000 pounds. Section 179 now also includes building improvements like HVAC, elevators, and security systems, Real estate, however, does not qualify.
To take the deduction, the property must be purchased and put into use during 2021, and it must be used more than 50% of the time for business purposes. The provision caps total equipment purchases for the year at $2.62 million (up from $2.59 million in 2020). Once you spend $2.62 million, the deduction is phased out on a dollar-for-dollar basis, and it totally phases out once you hit $3.67 million.
That said, if you made equipment purchases in 2021 that exceeded the $3.67 million limit, you may still use bonus depreciation on the amount above the Section 179 cap. Bonus depreciation remains at 100% through 2022. From there, bonus depreciation decreases by 20% each year until it totally phases out at the end of 2026.
If you made significant equipment purchases in 2021 or plan to make them in 2022, meet with us, your Family Business Lawyer™ , so we can work with you and your CPA to ensure you are maximizing all of your deductions for such major capital investments.
5. Deduct The Cost Of Your Business Insurance Policies
Most every business takes out some form of business insurance to protect against a variety of threats and liabilities. Yet, many business owners don't realize or simply forget that you can deduct 100% of the cost of most types of business insurance from your federal income taxes. The most common forms of business insurance that qualify for the 100% deduction include the following:
- Health insurance
- General liability insurance
- Commercial property insurance
- Business interruption insurance
- Professional liability/Malpractice insurance
- Cybersecurity insurance
- Worker's compensation insurance
- Vehicle insurance
Note that while most forms of business insurance are tax deductible, life insurance premiums are generally not deductible. There are a few exceptions, such as when you pay for your employee's life insurance premiums, which can be written off as a business expense, but even this comes with limitations
In this case, deductions can only be applied to premiums paid for the first $50,000 of coverage for each employee, and you are not permitted to deduct the premiums if you or the company benefit from the policy. Since it can be tricky to figure out when life insurance is deductible, meet with us, your Family Business Lawyer™ to find out whether or not your policies would qualify.
6. QBI Deduction For Pass-Through Income Still Available—And With Higher Income Limits
The Section 199A Qualified Business Income (QBI) Deduction is still available for 2021. Starting in 2018 and running through 2025, this provision allows qualifying business owners to take a straight 20% deduction on their net business income for the year. And this deduction is in addition to any ordinary business-expense deductions you might have.
To qualify, your business must be set up as a “pass-through” entity, meaning your company's taxes pass through and are paid at your personal income tax rate. This business structure includes sole proprietorships, partnerships, limited liability companies (LLC), and S corporations—basically all businesses except C corporations and LLCs taxed as corporations.
The deduction does have some restrictions, including for specific types of service businesses like law practices and accounting firms, and it begins to phase out at higher income levels. For 2021, the deduction begins to phase out once your taxable income surpasses $164,900 if single and $329,800 if married and filing jointly. The tax break completely phases out once your income reaches $214,900 for individuals and $429,800 for joint filers.
Given these restrictions, meet with us or your CPA to see if your company qualifies.
Maximize Your Company's Tax Savings For 2021
In addition to the tax breaks highlighted here, there are numerous other potential tax-saving opportunities that your company might qualify for. So even if you don't qualify for any of these, it's likely that there are others you can benefit from.
As your Family Business Lawyer™, we will work with you and your CPA to help you choose the tax breaks best suited for your business, and ensure you get the maximum benefit from the ones you qualify for during the 2021 tax season and beyond. Contact us today to get started.
This article is a service of R&R Legal Advisors LLC and Family Business Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death or incapacity. We also offer services specifically for startups and ongoing businesses, which review all of the legal, financial, and tax systems you need to LIFT your business. Call us today to schedule your consultation.