Keeping Good Records
One of the best ways to make sure you are taking advantage of all your allowable tax deductions is to keep good records. This means keeping receipts, making notes when necessary for additional explanation, staying current on recording transactions in your accounting records and keeping everything organized. Do not rely on memory or wait until after the end of the year to organize documents. You may forget something or lose the documents needed for support of a deduction.
Business Property Expensing Option
If your future business needs include new machinery, equipment, interior improvements to the building, a new roof or HVAC system, or other large capital items, consider purchasing and placing them in service before the end of the year. Most of these will qualify for the liberalized business property expensing option and/or the 100% bonus first-year depreciation deduction. Small- and medium-sized businesses will be able to deduct most, if not all, of the cost of these items in the current year even if they are in service for only a few days in 2021 and/or paid for with a credit card or loan.
Paying Expenses Before End of Year
For a small business that uses the cash method of accounting, consider timing your December billing later in the month so payments arrive early in 2022, and pay as many of your expenses as possible before the end of the year. Any qualified expenses that are paid with a credit card by the end of the year are deductible in the current year even if the credit card bill is not paid until the following year. More businesses now qualify to use the cash method of accounting for tax. The business must, among other things, satisfy a gross receipts test. For 2021, average annual gross receipts cannot exceed $26 million.
-Tom Dunn, Tom Dunn, CPA Firm
Employee Retention Credits
Many businesses haven’t investigated the very lucrative, refundable Employee Retention Credit opportunity because the rules changed so often. As recently as August, 75% of CPAs had yet to file a single claim for clients.
It’s particularly attractive to businesses with under 100 employees. Even single-employee (non-owner) employers frequently qualify for $20,000, or more. Twenty employee companies often qualify for well over $100,000. If your business was adversely impacted by a government order on COVID or has had at least one quarter with a 20% drop in revenue from 2019, you should investigate it.
Timing Capital Gains
Depending on your outlook, consider some counter-intuitive advice that differs from most years’ “normal” advice: accelerate capital gains and defer capital losses. The President’s party holds both House and Senate majorities and a key element of the Biden tax proposals is increasing taxes on both realized and unrealized capital gains. It’s unlikely anything will occur yet in 2021, but 2022 is another story.
Accelerating gains and deferring losses may avoid the future increase if it occurs. However, many other factors must be considered, and the legislation is only proposed. But, this might be the year.
Consider Transitioning to QuickBooks Online (QBO)
Intuit ended support for its QuickBooks 2018 product series May 31, 2021. Users can still use the application, but updates (e.g., for malware protection) cease and online services (e.g., payroll and bank interfaces) aren’t usable. Other products are also limited.
Intuit commits most of its development effort on QBO instead of desktop versions. Over the years, QBO features and advancements have far surpassed those far desktop versions. Give serious thought to making the leap to QBO while you can do so on your timeline instead of being rushed by a product discontinuance notice.
Vaccination Time Off
One piece of COVID relief is frequently overlooked. Most employers know about and take advantage of refundable payroll tax credits for paid employee/family sickness leave. However, companies frequently don’t consider the time off granted to obtain vaccinations to avoid getting sick (and time off for time lost to vaccine reactions).
While not a huge amount, it’s still throwing money away. An employer with 5 $13/hour employees needing 3 hours for travel and injections for two doses and one needs a full day off for a vaccine reaction could lose $500 of credits.
-Joe Eckelkamp, The E&A CFO Group
Online IRS Account
Setting up an online account at IRS.gov has many benefits. Anyone who received a stimulus payment or advanced child tax credit can obtain the amounts and dates those payments were received. That information will be required for your 2021 income tax filings. The account can also be utilized to change advanced child tax credit elections and obtain other useful information such as amounts of estimated tax payments made. It is also a way to check the current status of your personal IRS tax account.
-Nicole Thousand, Thousand CPA Services, LLC
Vehicle purchases may be eligible for Sec. 179 expensing, and buying a large truck or SUV can maximize the deduction. Businesses can generally write off 100% of vehicle purchase with a gross vehicle weight rating of more than 14,000 pounds. A $26,200 limit applies to vehicles (typically SUVs) rated at more than 6,000 pounds.
If you use a vehicle for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. Warning: If business use is 50% or less, you won’t be able to use Sec. 179 expensing.
-Rich Waigand, SFW Partners, LLC
Satisfy Your Charitable Inclinations
For 2021, charitable contributions can reduce taxes for both itemizers and non-itemizers. Taxpayers who take the standard deduction can claim an above-the-line deduction of $300 ($600 for married couples filing jointly) for cash contributions to qualified charitable organizations.
The adjusted gross income limit for cash donations is 100% for 2021; it’s scheduled to return to 60% for 2022. That means you could offset all of your taxable income with charitable contributions this year. (Donations to donor advised funds and private foundations don’t qualify, though.)
Taxpayers who don’t generally itemize can benefit by “bunching” their charitable contributions. In other words, delaying or accelerating contributions into a tax year to exceed the standard deduction and claim itemized deductions. For example, if you usually make your donations at the end of the year, you could bunch donations in alternative years — say, donate in January and December of 2022 and January and December of 2024.
Retired taxpayers who are age 70½ and older can reduce their taxable income by making qualified charitable contributions of up to $100,000 from their non-Roth IRAs. Retired or not, individuals age 72 and older can use such contributions to satisfy their annual required minimum distributions (RMDs). Note that RMDs were suspended for 2020 but are effective for 2021.
So long as the assets would be considered long-term if they were sold, donations of appreciated assets offer a double-barreled tax benefit. You avoid the capital gains tax on the appreciation and can deduct the asset’s fair market value as of the date of the gift.
Convert Traditional IRAs To Roth IRAs
As in 2020, when many taxpayers saw lower than typical income, 2021 could be a smart time to convert funds in traditional pre-tax IRAs to an after-tax Roth IRA. Roth IRAs have no RMDs, and distributions are tax-free.
You’ll have to pay income tax on the converted funds, but it’s better to do so while subject to lower tax rates. Similarly, if you convert securities that have dropped in value, your tax may well be lower now than down the road — and any subsequent appreciation while in the Roth IRA will be tax-free.
It’s worth noting that President Biden had proposed including a provision in the BBBA that would limit the ability of wealthy individuals to engage in Roth conversions. There was a lot of back-and-forth with respect to these provisions, and the latest version of the House bill includes certain restrictions. Whether these provisions will make it past any Senate amendments remains to be seen, but the proposal could be a harbinger of future proposed restrictions.
-Mark O’Donnell, Schmersahl Treloar & Co.
Teachers Eligible For Deducation
Teachers are still eligible to deduct up to $250 for out-of-pocket classroom expenses. But for 2021, the list of qualified expenses was expanded to include COVID-19 protective supplies (i.e. face masks, hand sanitizer, etc.)
For taxpayers looking to take advantage of charitable contribution deduction in 2021, you are able to check the legitimacy of the tax exempt organization using this IRS search engine : https://apps.irs.gov/app/eos/ This will help ensure that your contribution will qualify for the deduction. Also, married filing joint taxpayers qualify for an additional $600 charitable contribution deduction in 2021, even if they are taking the standard deduction.
-James Lunk, Fick, Eggemeyer & Williamson, CPA’s P.C.