Key Tax-Planning Strategies to Consider Before Year-End

With a new administration in the White House, more legislation introduced due to the ongoing pandemic, such as the American Rescue Plan Act (ARPA) and the Consolidated Appropriations Act (CAA), and additional legislation expected to pass before the end of 2021, the U.S. tax system continues to change, making it challenging to navigate for U.S. taxpayers.

To help ensure you take advantage of tax credits and deductions expected to expire or change in 2022, Doeren Mayhew’s tax advisors highlight these key tax-planning considerations.

What’s Sunsetting in 2021

Section 163(j) Limitation on Business Interest

Section 163(j) limits the deduction of business interest to the sum of a taxpayer’s business interest income, floor plan financing interest and 30% of their adjusted taxable income (ATI) for the tax year. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) modified the limitation to 50% of ATI for tax years beginning in 2019 and 2020, with special rules given to partnerships.

Final regulations issued by the Treasury and Internal Revenue Service (IRS) in January 2021 clarified how taxpayers can determine their ATI, which included an adjustment to allow taxpayers to add back depreciation, depletion and amortization for taxable years beginning after Dec. 31, 2017, but before Jan. 1, 2022. The Section 163(j) rules are complex, so be sure to consult with your tax advisor if taking advantage of this business interest limitation.

Charitable Contributions Deduction

The CARES Act expanded some of the tax rules related to charitable giving for individuals and businesses, which are set to expire the end of 2021. These include the following:

• Non-itemizing individuals may take a deduction of up to $300 (or up to a $600 deduction for married individuals filing jointly) for cash contributions made to eligible charities in 2021.
• Itemizing individuals may apply an increased limit of up to 100% of their adjusted gross income (AGI) for cash contributions made to eligible charities in 2021. This deduction is subject to certain limits based on the type of contribution and type of charitable organization.
• C corporations are now permitted to apply an increased limit of 25% of taxable income for charitable contributions of cash made to eligible charities in 2021.
• Businesses donating food inventory that are eligible for the existing enhanced deduction (for contributions for the care of the ill, needy and infants) may qualify for a 25% deduction limit. For C corporations, the 25% limit is based on its taxable income. For other businesses, including sole proprietorships, partnerships and S corporations, the limit is based on its aggregate net income for the year from all trades or businesses from which the contributions are made.

New Energy Efficient Homes Credit (45L Credit)

This credit is primarily a tax incentive for home builders and multifamily developers and allows an “eligible contractor” of a qualified new energy-efficient dwelling unit a $2,000 tax credit in the year that unit is sold or leased as a residence. The 45L credit was set to expire on Dec. 31, 2020, but was extended to Dec. 31, 2021, in the CAA. An eligible contractor is the person or entity who owns the qualified energy-efficient home during its construction.

Employee Retention Credit (ERC)

Introduced as part of the CARES Act, the ERC was extended through the Dec. 31, 2021. This credit allows eligible employers to claim a credit for paying qualified wages to employees of up to $28,000 per employee per year. We strongly encourage you work with your tax advisor to determine your eligibility and take advantage of this lucrative tax benefit before it’s too late.

Special Consideration: Business Meal Deduction

Also worth noting is the increase in the business meal deduction to 100% (formerly 50%) through the CAA. This temporary deduction is applicable for business meals that take place after Dec. 31, 2020, through Dec. 31, 2022, so be sure to maximize this tax deduction before it sunsets next year. Qualifying business meals for the 100% deduction include business meals provided by a restaurant, business travel meals provided a restaurant, meal expenses during entertainment (must be separate from entertainment expenses), company socials and holiday parties, and food and drinks publicly available. Be sure ample recordkeeping is kept for these expenses by saving your receipts, identifying who attended and the location, and describing the meal purpose as well as what was discussed.

Additional Tax Considerations

Congress anticipates passing a massive legislation bill that will change or eliminate some tax credits and deductions currently in place. Below are some key provisions to be aware of from a tax-planning perspective this year:

• Increase in tax rates. President Biden has proposed increased tax rates at the corporate, individual, estate and gifting levels. With this in mind, taxpayers should consider the following:
  • Accelerating income into 2021 or delaying deductions in 2022 and beyond (keeping in mind opportunity costs).
  • Deferring large charitable gifts to 2022, as the ability to deduct cash donations to certain public charities of up to 100% of income before deductions does not currently exist in 2022.
  • Taking the required minimum distribution (RMD) for Roth conversions this year if you’re a taxpayer who turned 72 in 2021, instead of delaying this until 2022, as it is permitted for first-year RMDs.
• Increase in capital gains rates. If your business is currently in the midst of a merger or acquisition, special attention will need to be given to the sale date, as any sales after a specific date in September may be taxed at the new, higher rates.
  • Under the proposed tax plan laid out by President Biden, which is expected to have an effective date of Sept. 13, 2021, the capital gains tax rate will revert the top individual income tax rate for taxable income above $400,000 to 39.6%. Doubling down on increases, the plan proposes to raise the long-term capital gains tax by 19.6% for those taxpayers with more than $1 million in annual income, putting the rate at 39.6%. Under current law, the capital gains rates are at 20% or 23.80%. With President Biden’s proposed changes, this could be as high as 43.4%.

• Restoration of the excess business loss limitation (Section 461(l)). The CARES Act retroactively postponed the effective date for Section 461(l) from tax years beginning after Dec. 31, 2017, to tax years beginning after Dec. 31, 2020, and allowed taxpayers who already filed their 2018 or 2019 returns with the excess business loss limitation to amend their returns and fully claim business losses.
  • This tax provision, which was originally created by the Tax Cuts and Jobs Act, limits the amount of trade or business deductions that can offset non-business income for non-corporate taxpayers, including individuals and trusts with business losses derived from sole proprietorships, partnerships or S corporations. This business loss limitation is effective beginning this year through 2025, so be sure to acknowledge this from a tax-planning perspective. For 2021, the indexed limited amount is $262,000 (or $524,000 for joint returns).

Plan Ahead

Doeren Mayhew’s tax advisors work closely with businesses and individuals to conduct year-end tax planning to assess their current tax situation and offer ways to minimize their tax exposure. To explore tax-savings opportunities you and/or your business should consider before the end of 2021, contact us today.