Business tax planning is something you need to constantly address. Whether you are a new business or one that’s been around for decades, tax planning needs to be a priority. The tax code continues to change from one presidency to the next, and other factors, such as COVID-19, lead to significant overhauls and provisions you need to consider. Tax planning in 2021 is like no other year and the quicker you get ahead of it, the better you will be.

Tax Planning Post-COVID

Tax planning in the post-COVID world will look drastically different than it did prior. Before COVID-19 came into our lives, we had an economy trending upward with smooth skies ahead. However, once the pandemic began, the world economy saw a drastic change. We are now in a state of recovery, but under a different presidency. That change likely means alterations to the tax code over time, for which you will need to plan.

Structuring Your Business

It's always beneficial to consider opportunities that structure your business for success when it comes to the tax code. As a business, you can operate as a sole proprietorship, partnership, limited liability company (LLC), S corporation, or C corporation. All these structures will impact how your taxes look at the end of each year.

You can use Form 8832 as part of tax planning 2021 to change your status from something such as a limited liability company to a C corporation with the Internal Revenue Service. The reason you want to make this change may be due to the Tax Cuts and Jobs Act of 2017. Under this, the corporate income tax rate went from 35% down to 21%. The new administration may alter this again, but it is still advantageous at the moment.

What To Do With the PPP Loan

Many businesses of varying sizes took advantage of the paycheck protection program, also known as PPP loans. The government made these funds available as a way to help businesses cope with the COVID-19 crisis. The loans allowed owners to keep employees on the payroll, pay rent, and take care of other necessities. These loans were attractive for many businesses as you could have them forgiven. 

One thing to note is that a change took place in 2020—IRS Notice 2020-32. Under this, it is clear that expenses that had a link to the money business owners received from the PPP loan could not be recognizable as a deduction. This means if you used those funds for payroll, you could not then deduct that payroll expense on your tax return. This would result in an increase in your tax liability as a business. 

Take Advantage of the QBI Deduction

There continues to be the opportunity to take advantage of the qualified business income (QBI) deduction from the Tax Cuts and Jobs Act of 2017. With this, pass-through business owners will get a deduction that is up to 20% of their business income. If you are in a specified service trades or business industry, such as law firms and medical practices, there is a phase-out for the deduction. For the 2020 tax year, this is $163,300 for a single person and $326,600 for married filing jointly.

A Credit for Paying Employees

One interesting opportunity for businesses is the ability to qualify for a tax credit for paying employees through the pandemic. The credit is worth half of the wages and health plan costs of the employee. It went against any wages from March 13, 2020, through December 31, 2020, initially, with a max of $5,000 per employee from the CARES Act. Then, this saw an extension from the Coronavirus Response and Relief Supplemental Appropriation Act of 2021, going through to June 30, 2021, increasing the credit to 70% of wages or up to $14,000 per employee.

Always Consult With Your Tax Professional

The rule of thumb here is you always want to be working with your tax professional. There is so much that changes from one year to the next when it comes to the tax code. Coming out of the COVID-019 pandemic, we have a new president and an economy that is starting to make a comeback. With all this, you have unique legislation in place a swell as even more unique legislation likely coming down the pipe later in 2021.

Business tax planning is something you always need to keep top of mind. Tax planning 2021 means looking at everything the CARES Act and other legislation brought to the table, while still taking advantage of the advantage tax legislation put in place in 2017 with the Tax Cuts and Jobs Act. As we look ahead, the opportunities will continue to increase for businesses that strategically navigate their tax liability to be most advantageous to the bottom line. If you have any questions, be sure to contact our team.