As we reach the end of the second COVID year, it’s hard to even think of another income tax deadline in three to four months.
But as Mark Twain once observed, the only two things you can count on in life are death and taxes.
The good news: If your small business was clobbered by the COVID pandemic and government shutdowns, you shouldn’t have to pay a lot in taxes for 2021.
The bad news: Sometimes our income tax laws work in crazy ways.
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.
American Rescue Plan Act
As COVID has continued to impact businesses, Congress passed the Consolidated Appropriations Act 2021 at the end of December 2020 and the American Rescue Plan Act this March. A major highlight of ARPA is a provision allowing businesses to fully deduct expenses paid with the proceeds of a forgiven Paycheck Protection Program loan, effectively overriding earlier guidance. The ARPA followed up by extending and modifying certain refundable payroll tax credits for both businesses and self-employed individuals, which are discussed in depth below.
As a result of this latter change, the IRS has revised Form 941-X to allow businesses to correct COVID-related employment tax credits reported on Form 941 earlier in the year. Reviewing your payroll tax returns to ensure that your business took full advantage of these credits, and filing any amended returns that may be necessary “should be one of your top year-end tax planning priorities,” according to D’Aquila.
Section 179: Expensing and Depreciation Deductions
Depending on what the income of your business looks like for 2021, there are two go-to deductions that generally take priority when trying to reduce income for tax purposes: the Section 179 deduction, where your business can elect to deduct the entire cost of certain property acquired and placed in service during the year, and the bonus depreciation deduction, where 100 percent of the cost of business property may be expensed. Under the Section 179 expensing option, your business can immediately expense the cost of up to $1,050,000 of “Section 179” property placed in service in 2021. This amount is reduced dollar for dollar (but not below zero) by the amount by which the cost of the Section 179 property placed in service during the year exceeds $2,620,000.
The bonus depreciation rules apply unless the business specifically elects out of those rules. Electing out might be preferable when a business expects a tax loss for the year and the bonus depreciation would just increase that loss, or where it might be advantageous to push depreciation deductions into future years. For example, where the owner of a pass-through entity to whom these deductions would flow expects to be in a higher tax bracket in future years, such deductions might be of more use in those future years. If applying both the Section 179 deduction and the bonus depreciation deduction to an asset, the Section 179 deduction applies first.
If you are in the market for a vehicle, the purchase of a sport utility vehicle weighing more than 6,000 pounds can trigger a bigger deduction than if a smaller vehicle is purchased. This is because vehicles that weigh 6,000 pounds or less are considered listed property and the related first-year deduction is limited to $18,200 for cars, trucks and vans acquired and placed in service in 2021. For vehicles weighing more than 6,000 pounds, however, up to $26,200 of the cost of the vehicle can be immediately expensed.
If you leased a passenger automobile in 2021 with a value of more than $51,000, the deduction available for that lease expense is reduced. In such cases, the lessee must include in gross income an amount determined by a formula the IRS issues each year.
Energy-Efficient Building Deduction
If your business made any energy-efficient improvements to a building during 2021, such as installing property that is part of 1. an interior lighting system; 2. heating, cooling, ventilation and hot water systems; or 3. the building envelope, an energy-efficient building deduction, which was made permanent in the CAA, may be available. The rules are pretty complicated, though, so talk to your accountant or tax professional about this.
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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