BMSS’ 2021 Year-end Tax Planning Letter
2021 has been a year filled with recovery from the pandemic and economic hardships of 2020. As many of the tax breaks legislators provided during the pandemic come to an end and many uncertainties surround the Biden Administration’s future on taxes, it is important to stay informed and plan for 2022 and beyond. Regardless of the uncertainties, this letter discusses some options available to help minimize your 2021 tax bill and plan for the coming years.
Year-end planning does not occur in a vacuum and is certainly impacted by the changing tax environment. As of the date of this letter, the Infrastructure Investment and Jobs Act passed Congress and was signed by the President last week and the Build Back Better Act (BBB) is currently the subject of negotiations in Congress. After the Congressional Budget Office (CBO) provided its analysis on how much is being spent and whether the revenue provisions would completely offset the new spending, the BBB passed the House and is on its way to the Senate. The version of the BBB introduced on November 3rd in the House Rules Committee can be read here. We will mention some implications of these two Acts in this letter but please reference recent and upcoming Beyond the Bottom Line newsletters for more in-depth analyses of the Acts.
Overview of General Goals and Objectives of Year-end Tax Planning
Most traditional income tax planning strategies focus on several key areas:
- Planning the timing (deferral or acceleration) of particular items of income or deductions, to the extent that they can be shifted from one year to another in order to take advantage of possible differences in the effective tax rate for the current year and succeeding year(s), limitations on deductions, or other factors that may differ from year to year;
- Maximizing, within overall general planning, the character of income (for example, qualified dividends and capital gains) that is subject to preferential, lower tax rates than ordinary income; and
- Taking advantage of special incentive provisions of the Internal Revenue Code when available such as §179 expensing, bonus depreciation, various credits related to a different business or personal activities, and Qualified Opportunity Fund investments.
To complicate matters further, these general planning strategies must also consider the impact of taxes other than the regular income tax, such as the alternative minimum tax, the net investment income tax, the Medicare surtax, and applicable state and local taxes, to name a few. The limitations applicable to certain itemized deductions must also be considered in planning for the timing of deductions.
As always, tax planning requires a combination of multi-layered strategies, considering a variety of possible scenarios and outcomes. There are various income and deduction items to consider and your BMSS trusted advisor will be glad to assist you to determine the most beneficial approach to take.
Capital Gain (Loss) Harvesting
Gain from the sale of capital assets held for longer than one year benefit from the reduced tax rate of no greater than 20 percent. An increase in the capital gains rate for individuals does not appear likely at this point, even though quite a buzz was created earlier in the year by initial Biden Administration proposals.
A common strategy regarding investment portfolios as you near the end of the year is to consider selling loss positions to offset incurred or planned capital gains before year end. Keep in mind the “wash sale rules” when reviewing year-end capital gains and dividends. Wash sales are sales of stock or securities in which losses are realized but not recognized for tax purposes because the seller acquires substantially identical stock or securities within 30 days before or after the sale. Non-recognition, however, applies only to losses; gains are recognized in full.
Qualified Opportunity Funds (QOFs)
If you have substantial capital gains, investments of eligible gains in QOFs remain a strategy, but we have not seen much traction in this area. This approach temporarily defers taxable events until the earlier of an inclusion event or December 31, 2026. This is an effective approach if you don’t have enough deductions or credits to offset your gains until a later time or you anticipate that the tax rates could decrease in a later year. Also, the longer you hold the assets in the QOF, the more advantageous your investment is treated for tax purposes.
Sale of Principal Residence
If you have or will sell your principal residence in 2021, an exclusion of up to $250,000 ($500,000 for married filing jointly taxpayers) applies to the gains from the sale of a principal residence. To be eligible for the exclusion, the residence must have been owned and occupied as your principal residence for at least two of the five years preceding the sale. If a taxpayer only satisfies a portion of the two-year ownership and use requirement, the exclusion amount is reduced (pro-rata basis). If you want to sell your principal residence but decide to wait because of unfavorable market conditions, you can rent the residence for up to three years after the date you move out and still qualify for the exclusion. Any gain attributable to prior year depreciation claimed during the rental period will be taxed at a maximum 25 percent rate. Note, that the same rate contingencies apply as in the capital gains section.
Alternative Minimum Tax – Individuals
The possibility of being subject to alternative minimum tax (AMT) should not be ignored as doing so may negate certain year-end tax strategies. While certain provisions under current law (e.g., the cap on state and local tax deductions and elimination of miscellaneous itemized deductions) mean fewer individuals will be subject to AMT, the tax does still exist. An AMT exemption is allowed; however, the exemption is phased out as taxpayers reach high levels of alternative minimum taxable income (AMTI).
Net Investment Income Tax (NIIT) – Individuals
The NIIT is a 3.8 percent Medicare surtax imposed on the lesser of an individual’s (a) net investment income (NII), or (b) the amount of modified adjusted gross income (AGI with foreign income added back) that exceeds the thresholds below:
- $250,000 for MFJ (married filing jointly) or SS (surviving spouse);
- $125,000 for MFS (married filing separately);
- $200,000 for single taxpayers and HOH (head of household).
The NIIT generally applies to passive income and is not imposed on income derived from a trade or business or from the sale of property used in a trade or business. NII includes the following:
- Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business;
- Gross income from a trade or business that is a passive activity for the taxpayer;
- Gross income from a trade or business of trading in financial instruments or commodities; and
- Gain from the disposition of property not held in an active trade or business.
NII can be reduced by certain investment-related expenses, such as investment interest expense, investment brokerage fees, royalty-related expenses, and state and local taxes allocable to items included in net investment income.
Keeping income below the thresholds, spreading income out over several years, or offsetting the income with both above-the-line and itemized deductions are possible approaches to avoid the NIIT. Of course, every taxpayer’s situation is different and planning for the NIIT requires a very personalized strategy.
Additional Medicare Tax – Individuals
An additional 0.9 percent high-income Medicare tax is imposed on wages and self-employment income that exceeds the same thresholds as the NIIT thresholds listed above. Although the thresholds are the same, this additional tax should not be confused with the 3.8 percent Medicare surtax on NII.
If federal income tax withholdings and estimated tax payments have not been made under a “safe harbor,” you can request that your employer withhold additional federal income taxes from your wages before year end to avoid an underpayment penalty related to this tax or the NIIT.
Converting a Traditional IRA to a Roth IRA
Considering whether to convert your traditional IRA to a Roth IRA is a tax planning strategy that can allow future distributions from the Roth IRA to be tax free. The taxpayer will have to pay tax on the converted funds, but once the money is in the Roth, all future earnings are tax free. Present and future tax rates, as well as the remaining number of years before planned distributions, are key in your decision on whether a Roth conversion makes sense. This is an effective strategy if your income is too high to invest in a Roth IRA as well.
If you expect the tax rate you will pay in retirement to remain the same or increase, then switching to a Roth IRA may pay off in regard to taxes. If your tax rate in retirement will be lower, the tax-free Roth distributions during retirement may not be advantageous. Also, you do not need to convert the entire amount to a Roth at one time. The money can be moved in increments over time, spacing out the tax hit. Recent legislative proposals have been made to limit the ability to perform Roth conversions, but actual changes are uncertain at this point. BMSS can assist with analyses of alternatives in this area, including the tax impact as well as the other differences between traditional and Roth IRAs
Contributing to your 401(k)
For 2021, the contribution limit is $19,500 ($26,000 for individuals age 50 or older). Amounts you defer and pay into your 401(k) plan are generally pretax, meaning they are not subject to federal income tax or payroll taxes. The exception to the pre-tax treatment is contributions to a Roth 401(k) plan if available from your employer. The IRS recently announced that the contribution limits for 2022 will be $20,500 ($26,500 for individuals age 50 or older).
Simplified Employee Pension Plans
A Simplified Employee Pension (SEP) plan allows employers to contribute to traditional IRAs set up for employees. Employers can contribute up to 25 percent of the employee’s annual salary (up to an annual maximum set by the IRS each year.) The maximum SEP contribution for 2021 is $58,000 and the contribution must be made by the extended due date of the employer’s return.
A self-employed individual can also contribute to an SEP plan. Net earnings from self-employment must be reduced by one-half of self-employment tax (which is computed prior to calculating SEP contributions) and the SEP contribution when computing the maximum deduction for the SEP contribution. The contribution must be made by the extended due date of the individual’s return.
Child and Education-Related Tax Benefits – Individuals
Most taxpayers can claim a credit for qualified expenses incurred in connection with the adoption of an eligible child. The credit for each adoption finalized in 2021 is limited to a maximum amount of $14,440 (nonrefundable) per child. Additionally, $14,440 received under an adoption assistance program may be excluded from gross income. Both the credit and gross income exclusion are phased out for higher-income taxpayers. Examples of eligible adoption expenses include adoption fees, legal fees, court costs, and travel expenses. The adoption credit is available for eligible expenses that are paid out of pocket, less any reimbursed amounts.
Different rules apply to adoptions regarding domestic children, foreign children, and children with special needs. For example, taxpayers who adopt a special needs child can claim the full amount of the adoption credit, even if the actual expenses were less than the maximum adoption credit of $14,440.
Child and Dependent Care Credit
Taxpayers who incur expenses to care for children under age 13 (or for an incapacitated dependent or spouse) to work or look for work can claim a credit for those expenses. The credit is calculated as a percentage of the expenses incurred, up to a maximum of $4,000 for taxpayers with one qualifying child or dependent and $8,000 for taxpayers with two or more qualifying children or dependents. A qualifying individual for the child and dependent care credit includes the following:
- A dependent qualifying child is under age 13 when care is provided, or
- A spouse, who is physically or mentally incapable of self-care, lived with you for more than half of the year.
Child Tax Credit (CTC)
Taxpayers are allowed an income tax credit of $3,000 for each qualifying child age 17 and younger ($3,600 for children under 6) at the end of the calendar year. The child tax credit is refundable, up to $1,400 for some taxpayers, but begins to phaseout for higher-income taxpayers at the thresholds below:
- $150,000 for MFJ (complete phaseout at $210,000);
- $112,500 for HOH (complete phaseout at $172,500);
- $75,000 for single taxpayers and MFS (complete phaseout at $135,000).
Taxpayers are also allowed to take a $500 nonrefundable credit for qualifying dependents other than children. Additionally, the American Rescue Plan Act provides for advance payments of the child tax credit. The pending infrastructure bill proposes shortening the length of the advance payments. If you would like to discuss your eligibility for the CTC, please contact your BMSS professional. Please be aware that you may need to pay back some of the advance credit with your 2021 tax return.
American Opportunity Tax Credit (AOTC)
The maximum credit that can be taken is $2,500 per eligible student for the first four years of higher education and up to $1,000 of that amount is refundable. The AOTC is phased out for single taxpayers with incomes ranging from $80,000 to $90,000, and for joint taxpayers with incomes ranging from $160,000 to $180,000.
The Lifetime Learning Credit for Education
The lifetime learning credit is a nonrefundable credit for qualified students and is available for all years of post-secondary education. The maximum credit is $2,000 and is phased out for single taxpayers with incomes ranging from $80,000 to $90,000 and joint taxpayers with incomes ranging from $160,000 to $180,000. The Lifetime Learning Tax Credit is not available in the following circumstances:
- The taxpayer claimed the AOTC during the same tax year;
- The taxpayer pays for college expenses for someone who is not a dependent;
- The taxpayer files federal income tax returns as married filing separately; or
- The taxpayer or spouse is a nonresident alien who is not treated as a resident alien for tax purposes.
Coverdell Education Savings Accounts (ESAs)
ESAs are trust or custodial accounts created exclusively to pay the qualified elementary, secondary, and higher education expenses of a single named beneficiary. Annual contributions are limited to $2,000 per beneficiary, but this limit begins to phase out at AGI of $95,000 for individuals and $190,000 for joint filers with complete phase out at $110,000 and $220,000, respectively. Contributions may be made to an ESA up to the original due date of the return. The contributions are not tax-deductible, but the designated beneficiary can receive tax-free distributions to pay qualified education expenses.
Qualified Tuition Programs (QTP)
A Qualified Tuition Program is an education savings plan designed to help families set aside funds for future college costs. Contributions to a QTP are not deductible, however, the earnings in the plan grow tax free, provided they are used for qualified expenses (e.g. tuition, fees, room and board, books, supplies, computers, and software) while enrolled at an eligible educational institution.
Educational Assistance Programs
Employees are allowed to exclude up to $5,250 from gross income and wages for annual educational assistance provided under an employer’s nondiscriminatory “educational assistance plan.” For employer programs to qualify, the program should not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. Also, employer-provided educational benefits may be excluded as a fringe benefit.
Any amount received as a qualified scholarship and used for qualified tuition and related expenses can be excluded from income. The exclusion does not apply to any portion of the amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship (with limited exceptions). Also, amounts used for incidental expenses, such as room and board, travel, and optional equipment, must be included in gross income.
Student Loan Interest Deduction
Taxpayers may deduct from gross income, subject to certain conditions, interest payments made on qualified education loans. The deduction is an above-the-line adjustment to income that can be claimed by all individuals, not just those who itemize. The maximum deduction of $2,500 is phased out for high-income taxpayers. Please be sure to keep any 1098-E forms you receive relating to this deduction.
Above the Line Charitable Deduction
Under the CARES Act, taxpayers are now able to take a $300 charitable deduction ($600 married filing jointly) without having to itemize your deductions on your 2021 tax return. A qualifying deduction will be a cash contribution made to a qualifying organization during the 2021 calendar year.
Qualified Business Income Deduction
For tax years beginning after 2017, taxpayers, other than corporations, may be entitled to a deduction of up to 20 percent of their qualified business income. For an individual taxpayer entitled to the full 20 percent deduction, the highest marginal rate on the qualified business income can be reduced from the highest regular tax marginal rate of 37 percent to 29.6 percent. For 2021, if taxable income exceeds $326,600 for married filing jointly or $163,300 for all other taxpayers, the deduction may be subject to certain limitations. The deduction may be limited based on whether the taxpayer is engaged in a service type trade or business (such as law, accounting, health, or consulting), by the amount of W-2 wages paid by the trade or business, and/or by the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in for joint filers between $329,800 and $429,800; $164,925 and $214,925 for married filing separate filers, and for all other taxpayers with taxable income, between $164,900 and $214,900.
The Standard Deduction and Itemized Deductions – Individuals
For 2021, the standard deduction is $25,100 for married filing jointly and surviving spouses, $18,800 for head of household, and $12,550 for all other taxpayers. The standard deduction is important for planning the timing of one’s itemized deductions (as discussed further below) as itemized deductions must exceed the standard deduction to maximize the tax value of the deductions. For taxpayers whose personal itemized deductions will not typically exceed the standard deduction each year, they might consider bunching certain deductions that would normally be paid in two or more years into a single tax year. Charitable contributions might be the personal expense that lends itself more easily to this situation, but medical expenses might also be considered for this technique.
- State and local taxes (SALT) (including personal property and real estate) are limited to $10,000 ($5,000 if married filing separately). If enacted, the Build Back Better Act will likely modify the SALT cap for taxpayers, with exact application and limitations still to be determined in negotiations.
- The floor for medical expenses in 2021 is 7.5 percent of AGI.
- Section 2205 of the CARES Act has increased the limit for cash charitable contributions from 60 percent to 100 percent of AGI. Any cash gifts in excess of the limit can be carried forward for five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100 percent AGI limitation.
- For mortgages taken out after December 14, 2017, only interest on the first $750,000 of mortgage debt is deductible. For mortgages before December 14, 2017, the mortgage interest deduction lets you deduct mortgage interest paid on the first $1,000,000 of mortgage debt for a primary or secondary home.
- Interest on home equity loans is no longer deductible if it is not connected to home improvement expenses. Interest on home equity loans is subject to the $750,000 mortgage limit (MFJ), or $375,000 for a married taxpayer filing a separate return.
- Personal casualty losses are deductible only if they are attributable to a federally declared disaster and only to the extent the $100 per casualty and 10 percent of AGI limits are met. Additionally, theft losses are deductible up to the fair market value of the property, but taxpayers need to prove that all of the requirements for theft, in their state, occurred to claim theft losses.
Until the clock strikes midnight to ring in the new tax year, it is not too late to plan your 2021 taxes. By simply accelerating expenses, deferring income, or vice versa, you could significantly lower your tax bill without missing out on the money deferred or spent for long. For example, if you are approaching a higher tax bracket at year end, strategic timing regarding the closing of sales or other transactions, or the performance of services and the related billing, might allow you to defer income until early next year in order to stay in the lower tax bracket this year. The same could be true of the reverse scenario, if you expect to be in a higher bracket next year, you may be able to accelerate income in order to have that income subjected to a lower tax rate.
Additionally, you could accelerate or defer expenses. For example, if you have a large gain this year that you need to offset, consider paying your January expenses in the current year instead of waiting until they are due. If the opposite is true or you have exceeded your allowable deductions in the current year, consider deferring some of your expenses, if possible. If you are close to itemizing this year and have large medical bills, it may be better to pay all of those bills in the current year to take advantage of itemization and maximize the medical deduction. If you don’t expect to itemize next year, it would not be wise to pay those bills next year even if they are not due this year. Remember that individuals are generally cash-basis taxpayers and, therefore, expenses are deductible when paid instead of when accrued.
Lastly, you can accelerate and defer sales of assets, a principal residence, and other personal property in order to time gains and losses to offset other tax consequences. Be aware that some tax law provisions and the method of accounting employed by the taxpayer limit the ability to accelerate or defer certain income or expenses. Our discussion above is more of a conceptual discussion. For a clear understanding of the tax impact of any steps that you might take to affect the timing of income or expenses, please discuss those plans with BMSS.
Other Measures – Adjusting Withholding / Estimated Tax Payments
If you owed money on your 2020 tax return, your withholdings may be too low. You may wish to consider adjusting your withholdings for the remainder of the year to reduce or eliminate a balance due. Furthermore, you can pay estimated tax payments based on your 2020 tax due towards year end. Your total withholdings and estimates paid must equal 100% of your 2020 taxes due (110% if your 2020 AGI exceeded $150,000 for MFJ) to avoid penalties. If you expect your 2021 liability to be less than your 2020 liability, your withholding and /or estimates must exceed 90% of your 2021 actual liability to avoid a penalty for underpayment of estimated taxes.
Estate, Trusts, and Gift Taxes
The 2021 estate and gift tax exemption is $11,700,000 per person ($23,400,000 for a married couple). These figures are scheduled to go back to $5 million and $10 million, respectively, after 2025; however, these limits can be reduced by legislation. Preliminary consideration to more robust gifting strategies for 2021 may be appropriate. IRS regulations issued in 2018 indicate that gifts under the gift tax exemption amount at the date of the gift(s) will not be “clawed back” upon a taxpayer’s death even if the taxpayer made gifts in excess of the estate tax exemption ultimately in effect at the taxpayer’s death. The maximum federal unified estate and gift tax rate is 40 percent. The annual gift tax exclusion allows taxpayers to give up to $15,000 during 2021 to any individual ($30,000 for married couples who split the gifts), gift-tax free and without counting the amount of the gift toward the lifetime exclusion. The annual exclusion for gifts made to non-citizen spouses in 2021 is $159,000.
Exclusion for Educational and Medical Expenses
In addition to the $15,000 annual exclusion amount, nontaxable gifts or transfers may be made for certain educational and medical expenses. Any amount paid on behalf of an individual as tuition directly to certain educational organizations for the education or training of such individual is not treated as a transfer by gift for purposes of the gift tax. For medical expenses, the exclusion applies for certain medical expenses paid on behalf of an individual not reimbursed to the individual by insurance. The exclusion for educational and medical expenses is unlimited in amount and can be made on behalf of anyone you choose, regardless of relationship. To take advantage of these exclusions, the payments must be made directly to the educational institution or health care provider.
Year-End Trust Distribution Planning
For certain trusts that are not required to make distributions, distribution planning is important in order to minimize the overall tax due on the trust’s income. In general, a trust not otherwise required to make distributions is liable for the tax on all of its income if no distributions are made to beneficiaries. If distributions are made, the beneficiary is taxed on the portion of the income distributed, not the trust. Trusts hit the top income tax rate of 37 percent for ordinary income in excess of $13,051 in 2021. For individuals, this amount is $523,601 for single filers and $628,301 for joint filers. Due to the compressed tax bracket for trusts, distributions to beneficiaries often result in a lower overall tax burden. Of course, all factors should be considered as to whether a distribution is appropriate, not only for income tax planning. If a trustee determines that distributions are appropriate, trusts have until 65 days after year end (March 5, 2022) to make a distribution and treat it as a distribution for the 2021 tax year.
Reviewing Retirement Plan Beneficiaries
For future planning purposes, avoid unintended consequences by updating beneficiary designations of your 401(k) or 403(b) plans, annuities, pensions, and IRAs to account for life changes such as marriage, divorce, or the death of a spouse or other beneficiary listed. Also, be sure to review the beneficiaries listed in your will and taxable accounts. If you do not have a will, consider drafting one sooner rather than later.
Alabama Qualified Dispositions in Trust (QDIT) Act
In a recent Beyond the Bottom Line, we alerted you that on April 24, 2021, Alabama became the twentieth state to enact domestic asset protection legislation when Kay Ivey signed into law the Alabama Qualified Dispositions in Trust Act. The motivations for the Alabama legislature in passing this bill included giving Alabama residents the ability to set up a domestic asset protection trust without utilizing the trust laws of some other jurisdiction. The QDIT Act provides another powerful tool for individuals and advisors in financial and estate planning. While there are a number of specific requirements that must be met, this type of trust structure could prove to be incredibly beneficial to the residents of Alabama. Additionally, although the requirements are somewhat stringent, they serve as safeguards towards the abuse of state legislation like we have seen in states such as South Dakota. Please remember the QDIT Act if you believe that establishing an Alabama DAPT trust could be beneficial for your financial situation.
Recent legislative proposals point toward potential estate and trust changes. Such changes could have significant impacts, which are discussed in our Beyond the Bottom Line newsletter. However, the likelihood that such proposals come to fruition is unknown at this time. Contact your BMSS professional for specific questions regarding these proposals.
C corporations continue to face double taxation, with taxes paid once at the entity level and again when dividends are paid to shareholders. With the Tax Cuts and Jobs Act (TCJA) of 2017, the C corporation tax rate was reduced to 21 percent. Earlier this year, the President’s budget proposals included an increase in corporate tax rates. That proposal, however, appears to have been removed from further consideration and is unlikely in any legislation that might pass Congress this year. Many businesses, however, are not taxed at the entity level as corporations; instead, taxable profits and losses are passed through to their owners. With the highest individual tax rate at 37 percent and additional surtaxes on passive income by way of the 3.8 percent Net Investment Income Tax, minimizing tax remains a challenge in 2021.
100 percent first-year bonus depreciation is available for qualifying property placed in service in the 2021 tax year. In order to be eligible for bonus depreciation, qualifying property can be new (first-time use) or used tangible property. Any qualifying property acquired and placed in service after September 27, 2017 and before January 1, 2023 is eligible for bonus depreciation. In addition, buyers of heavy SUVs used solely for business can write off the full cost, thanks to bonus depreciation. SUVs must have a gross weight rating of over 6,000 pounds. Further, the bonus depreciation deduction will decrease in future years as follows:
- 80 percent for property placed in service after December 31, 2022 and before January 1, 2024
- 60 percent for property placed in service after December 31, 2023 and before January 1, 2025
- 40 percent for property placed in service after December 31, 2024 and before January 1, 2026
- 20 percent for property placed in service after December 31, 2025 and before January 1, 2027
Code Section 179 Expensing
Code Section 179 property includes new or used tangible personal property that is purchased to use in an active trade or business. Under the enhanced expensing for 2021, businesses can expense up to $1,050,000 in qualifying expenditures, with no reduction unless expenditures exceed $2,620,000. Note that the amount expensed cannot exceed the business’ taxable income. Bonus depreciation does not have this rule. Furthermore, Section 179 and bonus depreciation cannot be used on the same asset.
Net Operating Loss
Net operating losses are now back to their original post-2017 treatment; taxpayers are only allowed to carry the loss forward to future years to offset 80 percent of the current year’s taxable income. The CARES Act temporarily allowed a carryback as well, but that treatment expired in 2020.
Limitation on the Deduction of Business Interest
In general, the deduction is limited to the sum of:
- The taxpayer’s business interest income for the tax year for which the taxpayer is claiming the deduction (not including investment income);
- 30 percent of the taxpayer’s adjusted taxable income; and
- The taxpayer’s floor plan financing interest.
The limitation applies to all taxpayers except a small business with average annual gross receipts for the three prior tax years of $25 million or less for 2021. The small business exception does not apply to tax shelters, including syndicates, which remain subject to the limitation. The limitation also does not apply to certain excepted businesses including an electing real property business, an electing farming business, and certain regulated utility businesses. BMSS is equipped to assist you in determining the application of the limitation to your business.
Taxpayers can defer the gain (or portion of that gain) on the exchange of like-kind property. Both the relinquished property and the acquired property must be held for business or investment purposes. After the TCJA, like-kind exchanges are limited to exchanges of real property that are held for use in a trade or business or for investment. Real property includes land and generally anything built on or attached to it. Furthermore, exchanges of personal property no longer qualify for deferral.
Tangible Personal Property Regulations
The IRS issued final regulations in 2014 that refine and simplify the rules for expensing tangible personal property, including the de minimis safe harbor. For 2021, the safe harbor enables taxpayers to routinely deduct items whose cost is below $5,000 for taxpayers with an applicable financial statement (AFS) and $2,500 for taxpayers without an AFS.
Research and Development Credit
The Research and Development (R&D) Credit provides a credit for 20 percent of qualified research expenses over a base amount. The credit applies to any amounts paid or incurred for qualified research and experimentation. BMSS has a Research and Development team ready to meet with you to discuss your company’s R&D potential.
Alabama Electing Pass-Through Entity Tax Act
Earlier this year, the Alabama legislature passed, and Gov. Ivey signed into law, the Alabama Electing Pass-Through Entity Tax Act. With the passage of this Act, Alabama joined other states by enacting its own version of an elective pass-through entity (“PTE”) tax, which allows eligible PTEs (i.e., Subchapter S corporations and Subchapter K entities) to elect to be taxed at the entity level. The Act and others like it around the country are a response to the $10,000 cap placed on the state and local tax deduction that may be taken by individuals under the Tax Cuts and Jobs Act. IRS Notice 2020-75, released on November 9, 2020, provided guidance from the IRS stating that PTEs may claim entity-level deductions for state income tax paid under state laws that shift the tax burden from individual owners to the business entity. Recent negotiations regarding the Build Back Better Act have included provisions that would modify or repeal the $10,000 SALT deduction cap. Pass-through entities should continue to monitor developments regarding the SALT cap and possible implications for an election under the Alabama Electing Pass-Through Entity Tax Act.
PPP Loan Safe-Harbor
If you filed your 2020 tax return before December 27, 2020 and took the approach that your PPP-related expenses would not be deductible, you may be eligible to deduct those expenses on your 2021 tax return instead of amending your 2020 return. BMSS is able to help you determine your eligibility to deduct such expenses.
In March 2021, the IRS announced that if taxpayers earn less than $150,000 AGI, it will automatically refund taxes paid on the first $20,400 of unemployment benefits for MFJ and $10,200 for all other taxpayers. If you feel you were eligible for this refund and have not received it, please contact your BMSS professional.
Recovery Rebate Credit
Like in 2020, you may be eligible for the recovery rebate credit on your 2021 tax return if you did not receive certain government COVID relief payments. If you did not receive the 2021 payments or do not know if you received the 2021 payments, please make note of this on your tax documents so that your BMSS professional can calculate your eligibility for the credit.
We’re Here to Help You
BMSS understands the complexity of the tax laws and the stress of year-end tax planning. However, year-end tax planning is vital to protecting your financial well-being. This letter only hits the high points of the tax law so there may be other strategies that could reduce your tax liability.
Please contact BMSS at (833) CPA-BMSS if you have any questions regarding your tax planning opportunities whether or not addressed in this letter. BMSS is ready to help you with your unique tax planning circumstances and can set up an appointment to discuss your situation.