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2021 Small Business Tax Return Changes

Certain tax changes will go into effect in 2022 that could affect how you file your next small business tax return. Charlotte-based CPA for small businesses, Scott Boyar, offers these helpful tips to make sure you take advantage of these changes before they take advantage of you. 

Tax Rate Changes

Depending on your business structure, your business take rate will likely change in 2022. 

If one particular proposal currently before Congress passes, the corporate tax rate will rise to 26.5% from 21%, and the top individual tax rate will go up to 39.6% from 27%. 

If you own a pass-through business, your taxes may increase in 2022 by even more due to several additional factors.

  • Qualified Business Income Deduction - Changes in the QBID could restrict or even completely do away with the now-20% personal deduction on business income for higher-income earners.
  • Net Investment Income Tax - If one proposal passes Congress, instead of applying solely to owners who don’t participate materially in their businesses (ie. silent partners,) the 3.8% NII tax would apply to the pass-through income of all owners otherwise subject to the tax regardless of participation.
  • Local and State Income Taxes - Changes in Federal tax rules could trickle down to affect local and state income tax rules, like the Federal deduction for state and local taxes. This tax includes a SALT cap of $10,000 that applies under certain conditions, but that cap may either increase or disappear altogether, which could benefit or harm small business owners depending.

New Tax Rules

Several new tax rules are either going into effect or under consideration in Congress for the next tax reporting season. 

Secure Act 2.0

A collection of new retirement-based rules are currently being bandied about that could affect your company’s retirement plan. It may require an incremental increase in the age requiring minimum distributions to begin at 75. It may also potentially mandate automatic retirement plan enrollment, giving an opt-out option rather than the current opt-in option, or the ability to change how much of their salary is reduced to contribute to a retirement account. The changes may also raise the small business tax credit for starting retirement plans, including automatic enrollment. 

Temporary Meals Expense Deduction Limit Exception

For 2021 and 2022, the IRS has temporarily lifted the limit on the amount of money spent on meal expenses you can deduct from your business taxes. Current tax law states you can only deduct half the cost of business meals, but you can deduct the total amount of business-related meal expenses for these two years. These deductions are allowable provided the meals are considered “ordinary and necessary” for conducting your business and are not considered lavish or extravagant.

Excess Losses

In 2021, any non-corporate taxpayer can deduct a business loss or net trade of up to $262,000 (or $524,000 for a joint return) maximum. This may, but need not, include Schedule C (Business,) Schedule F (Farming) and Schedule E (Rents and Royalties) activities, among others. The IRS considers any such excess loss as a net operating loss, or NOL, and carries it forward to future tax years. 

Employee Retention Credit

Originally enacted on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) created the Employee Retention Credit to encourage employers to keep employees on the books during the COVID pandemic through January 1, 2021. At the end of 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) amended and extended that credit into mid-2021.

Under this Act, if you maintained workers on your company payroll during the COVID pandemic, then you may be entitled to a tax credit amounting to one-half of the costs of wages you paid to those employees and the health care costs you incurred for those employees during that period. You can also claim this on your 2021 tax return for 70% of as much as $100,000 worth of your share, as the employer, of Social Security taxes on employee wages. 

Employee Paid Sick Leave and Related Tax Credits for Affected Small Businesses

If an employee needed to take sick leave at any time within the first nine months of 2021 due to coronavirus, both the employee and his or her employer receive tax protections. The COVID-related Tax Relief Act of 2020 amended and extended the Families First Coronavirus Response Act (FFCRA), which provided tax credits to employers so they can provide affected employees paid sick leave. The extension of this credit adds the possibility for advanced payments.

Higher Corporate Charitable Donation Deduction

If you donated to charity as a corporation during 2021, the deduction you receive for doing so is larger than usual. Instead of deducting the normal 10% from your taxes, you can deduct 25 percent. 

Expiring Provisions

Specific tax provisions will expire at the close of 2021, including energy-related tax credits like those for energy-efficient home builders and two-wheel, plug-in electric-drive vehicles. Any of these credits, if not all of them, may be extended into the next and future years, but no announcement has been made as of this early December 2021 writing saying so. 

What You Need to Do to Keep Up With These 2021-22 Tax Changes

Consider Changing Your Business Structure

Each type of business entity is subject to different tax rules. As these rules change for 2021-22, the type of business entity you’ve currently structured your business as may no longer be the most advantageous choice for you for tax purposes. Consider which business entity would allow you to make the most efficient use of your business income and deductions. 

For instance, the lower the corporate tax rate, the more advantageous a C Corporation seems for tax purposes, and therefore the greater the number of small businesses whose owners may want to consider changing their business entity from a sole proprietorship, LLC, or partnership to a C Corporation. 

Consult With a Qualified Tax Accountant

To stay up to speed on which proposals have passed in time to affect your upcoming business tax filings and make sure you file your business tax returns properly, you can certainly return here for updates. But what you really need is the help of a qualified and knowledgeable small business CPA who stays current with all the latest changes to federal, state and local tax codes. 

Only a small business CPA in Charlotte, for instance, can be sure to tell you whether you’re filing the correct forms and paying the right amount of taxes, and no more, for your Charlotte small business.

Scott Boyar, CPA, is at your service for a small business tax advisor a North Carolina small business owner can trust. A tax accountant with a long history and record of helping small businesses prepare and file their tax returns each year, Scott Boyar stays on top of all the latest changes to the tax code, so you don’t have to. Only a knowledgeable, locally-based CPA for small businesses like Scott Boyar can make sure your business pays the least in taxes and reap the greatest tax benefits now and in the future on the federal, state, and local Charlotte levels.

Posted by Scott Boyar CPA

 

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