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.
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:
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.
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:
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.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
A quick registration is required to view our resources.
You will only be asked to do this one time (unless you don't save your browser cookies).