As we exit the second COVID year, it’s time to start thinking about 2021 tax filings this coming April. As always this time of year, I’m indebted to my good friend John D’Aquila, a Certified Public Accountant and head of D’Aquila and Co. LLP in Jacksonville, Florida (www.daquilallp.com), for sharing some of his year-end tax tips with me and allowing me to share them with you.
Employee Benefits
The employment landscape has changed significantly since the beginning of the COVID pandemic. Many businesses are facing worker shortages and are reevaluating what it will take to get employees in the door. If your business is not already doing so, it may reap substantial tax benefits, as well as nontax benefits, by offering a retirement plan and/or other fringe benefits to employees. Businesses that offer such benefits have a better chance of attracting and retaining talented workers, which, in turn, reduces the costs of searching for and training new employees. Contributions made to retirement plans on behalf of employees are deductible and your business may be eligible for a tax credit for setting up a qualified plan.
In addition, as a business owner, you and your spouse can take advantage of a retirement plan yourselves. By adding your spouse as an employee and paying a salary up to the maximum amount that can be deferred into a retirement plan, you could realize significant tax savings.
Because health insurance is a much-sought-after employee benefit, you might consider setting up a high-deductible health plan paired with a health savings account. The benefits to your business would include savings on health insurance premiums that would otherwise be paid to traditional health insurance companies and having employee wage contributions to the plan not being counted as wages. Thus, neither your business nor the employee would be subject to FICA taxes on the payroll contributions. As for the employee, he or she can reap a tax deduction for funds contributed to the HSA. Because there is no use-it-or-lose-it policy, the funds can grow tax-free and be used in retirement.
Payroll Tax Credits
Refundable payroll tax credits are available for businesses with under 500 employers that offered paid sick or family leave through Sept. 30, 2021 (i.e., qualified leave wages) to employees who took leave due to COVID-19. The payroll tax credits are also available to self-employed individuals, who will recoup these credits by filing Form 1040 or Form 7202, “Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals.”
Employee Retention Tax Credit
Your business may be eligible for an employee retention tax credit if your business either had its operations fully or partially suspended under government orders in 2021 or experienced a decline in gross receipts for a quarter in 2021 of 20 percent or more compared to the same quarter in 2019 (i.e., a “significant decline in gross receipts”). However, if the business did not exist as of the beginning of the same calendar quarter in calendar year 2019, then the same calendar quarter in 2020 is used. The ERTC generally equals 70 percent of the first $10,000 in wages, including certain health plan expenses, per employee in each quarter of 2021. For the third and fourth quarters of 2021, the credit amount is increased to $50,000 per quarter if the business is a "recovery startup business.”
A recovery startup business is any business that 1. Began carrying on any trade or business after Feb. 15, 2020, 2. For which the average annual gross receipts for the three-tax year period ending with the tax year that precedes such quarter does not exceed $1,000,000 and, 3. With respect to such quarter, the operation of the trade or business is not subject to a government-ordered suspension or a significant decline in gross receipts.
It’s worth noting that the infrastructure bill passed by the Senate would terminate the ERTC as of Sept. 30, 2021. That provision does not affect a recovery startup business, and it's unknown whether this provision will survive in a final bill.
Qualified Business Income Deduction
If you are conducting your business as a sole proprietorship, a partner in a partnership, a member in an LLC taxed as a partnership or as a shareholder in an S-corporation, the qualified business income deduction under Code Section 199A can significantly help reduce taxable income. The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. A W-2 wage limitation amount may apply to limit the amount of the deduction if your taxable income that exceeds a specific threshold amount. For any tax year beginning in 2021, the threshold amount is $329,800 for married filing joint returns, $164,925 for married filing separately and $164,900 for all other returns.
Impact of Future Tax Legislation
Who knows?
Presently, Congress is engaged in negotiations on a huge tax and spending bill that will likely result in significant tax changes affecting businesses, beginning next year. As events unfold, this column will try, as always, to stay on top of them.
Best wishes to all my readers for a happy, safe and successful 2022!
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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