You may want to accelerate, or possibly even defer, deductible business expenses in 2021, depending on your specific situation and the potential impact of pending tax legislation on 2022 tax rates.
At year-end, a business may secure one or more of three depreciation-related tax breaks: (1) the Section 179 deduction; (2) first-year “bonus” depreciation; and (3) regular depreciation.
YEAR-END MOVE: Make sure that qualified property is placed in service before the end of the year if you want to take advantage of these deductions in 2021. If your business does not start using the property, it does not qualify for these tax breaks.
- Section 179 deductions: Under this section of the tax code, a business may “expense” (i.e., currently deduct) the cost of qualified property placed in service anytime during the year. The maximum annual deduction is phased out on a dollar-for-dollar basis above a specified threshold. The maximum Section 179 allowance has increased gradually since it was doubled to $500,000 in 2010. As shown below, the TCJA effectively doubled the amount again in 2018.
|Tax year||Deduction limit||Phase-out threshold|
|2018||$1 million||$2.50 million|
|2019||$1.02 million||$2.55 million|
|2020||$1.04 million||$2.59 million|
|2021||$1.05 million||$2.62 million|
However, be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2021.
- First-year bonus depreciation: The TCJA doubled the 50% first-year bonus depreciation deduction to 100% for property placed in service after September 27, 2017 and expanded the definition of qualified property to include used, not just new, property. However, the TCJA gradually phases out bonus depreciation from 2023 through 2026.
- Regular depreciation: If any acquisition cost remains, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).
Tip: The CARES Act fixed a glitch in the TCJA relating to “qualified improvement property” (QIP). Thanks to the change, QIP is eligible for bonus depreciation, retroactive to 2018. Therefore, your business may choose to file an amended return for a prior year.
Employee Retention Credit
Many business operations have been disrupted by the COVID-19 pandemic, and recent legislation provides tax incentives for keeping workers on the books during these uncertain times.
YEAR-END MOVE: Consider whether your business qualifies to claim the Employee Retention Credit (ERC), which was authorized by the CARES Act to help offset the cost of retaining employees despite a downturn in the business.
Under the CARES Act, the ERC was equal to 50% of the first $10,000 of qualified wages per quarter, and a maximum credit of $5,000 per worker. The CAA extended availability of the credit into 2021 with certain modifications, including a maximum ERC of $14,000 per worker and covering wages paid through June 30, 2021. Then ARPA authorized a maximum credit of $28,000 per worker for 2021 by extending the credit to cover wages paid during the third and fourth quarters.
The CAA also made it easier for businesses to qualify for the ERC, including reducing the threshold for determining if a business has experienced a significant decline in gross receipts and allowing businesses that received PPP loans to qualify for the ERC (but not based on the same payroll dollars). These rules can be complicated to navigate, and you may want to seek professional assistance in determining if you are eligible for the ERC.
In addition, ARPA allows businesses that started up after February 15, 2020 and have an average of $1 million or less in gross receipts to claim a credit of up to $50,000 per quarter.
Tip: It is possible that the ERC will be extended again, but it is currently set to expire after 2021 and the Infrastructure Investment and Jobs Act (passed by Congress on November 5th) will effectively end the ERC for wages paid after September 30, 2021, when signed into law by President Biden.
Prior to 2018, a business could deduct 50% of the cost of its qualified business entertainment expenses. However, the TCJA permanently eliminated the deduction for entertainment expenses, including strictly social meals preceding or following a “substantial business discussion.”
YEAR-END MOVE: Stay the course. Current law still allows deductions for certain business meals if you have the records needed to support your claims. Plus, your business may benefit from an enhanced deduction in 2021.
For starters, a business can deduct meal expenses of employees traveling away from home on business. In addition, the cost of food and beverages associated with entertainment such as sporting events and concerts may be deductible if the food and beverages are invoiced separately. The IRS has issued detailed regulations relating to these deductions.
Note that the cost of the food and beverages cannot be artificially inflated. Obtain the invoices from the appropriate venues.
Tip: ARPA doubled the usual 50% deduction to 100% of the cost of food and beverages provided by restaurants in 2021 and 2022. Thus, your business may write off the entire cost of some meals this year.
Work Opportunity Tax Credit
If your business becomes busier than usual during the holiday season, it may add to the existing staff. Consider all the relevant factors, including tax incentives, in your hiring decisions.
YEAR-END MOVE: All other things being equal, you may hire workers eligible for the Work Opportunity Tax Credit (WOTC). The credit is available if a worker falls into a “target” group.
Generally, the WOTC equals 40% of the first-year wages of up to $6,000 per employee, for a maximum of $2,400. For certain qualified veterans, the credit may be claimed for up to $24,000 of wages, for a $9,600 maximum. There is no limit on the number of credits per business.
The WOTC has expired—and then been reinstated—multiple times in the past, but the CAA extended it for five years through 2025.
- The TCJA required that any research and development costs incurred after 2021 would have to be amortized ratably over five years rather than deducted in the year the costs are incurred (or amortized at the election of the taxpayer subject to specific requirements). Any R&D costs incurred before the end of this year would still be eligible for an immediate deduction. (Note that a recent version of the BBB Act includes a provision that, if passed, would delay the TCJA amortization requirement until 2026.)
- Under the CARES Act, a business could defer 50% of certain payroll taxes due in 2020. Half of the deferred amount is due at the end of 2021, so meet this obligation if it applies.
- If you pay year-end bonuses to employees in 2021, the bonuses are generally deductible by your company and taxable to the employees in 2021. A calendar-year company operating on the accrual basis may be able to deduct bonuses paid as late as March 15, 2022, on its 2021 return. In order to deduct accrued bonuses in 2021, the bonuses must not be subject to any contingencies as of year-end. Related party rules also apply.
- If your business received a Second Draw (or First Draw) PPP loan and you have not yet applied for loan forgiveness, consider applying for forgiveness but discuss first with your financial advisor to ensure that all relevant factors have been considered and proper documentation is provided. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, PPP loan payments are no longer deferred.
- Maximize the qualified business interest (QBI) deduction for pass-through entities and self-employed individuals. Note that special rules apply if you are in a “specified service trade or business” (SSTB).
- ARPA extends a 2020 increase in the annual deduction limit from 10% of taxable income to 25% for C corporations making qualified contributions to charity in 2021.
- Generally, repairs are currently deductible, while capital improvements must be depreciated over time. Therefore, make minor repairs before 2022 to increase your 2021 deduction.
- Stock up on routine supplies (especially if they are in high demand). If you buy the supplies in 2021, they are deductible in 2021, even if you do not use them until 2022.
- If you are facing potential write offs of receivables, keep records of collection efforts (e.g., phone calls, emails and dunning letters) to prove debts are worthless. This may allow you to claim a bad debt deduction.