2021 Need to Know Tax Code Updates
Knee Deep in Tax Season
Still on the heels of dealing with the major changes incited by the 2017 tax reform, the Tax Cuts and Jobs Act, many business owners are wondering what tax code updates they can expect when filing their 2020 business tax return. Especially after the numerous changes to the norm 2020 already brought about. Although there were not many major changes to the tax code for the 2020/2021 filing year, the following discussion will outline what small business owners should keep in mind when working with their tax accountants.
Types of Small Business Taxes
To make sure we are all straight on the topic of business tax returns let’s quickly review the primary types of taxes small business owners are responsible for.
- Income Tax. Typically when talking about taxes, the income tax return is the big one that comes to mind. All businesses will file an annual income tax return. And this is the upcoming deadline we’ve been harping on about – partnerships (LLCs) and S-corps’ returns are due on 3/15 and C-Corps and individual returns are due 4/15.
- Self-Employment Tax. If you’re a solopreneur, this is your category. Self-employment taxes are due on your net earnings from being self-employed and contribute to your social security and medicare obligations.
- Employment Taxes. If you are not an owner-operator then you will have employees and will need to file for employment taxes which include employee’s social security, medicare taxes, federal income tax withholdings, federal unemployment tax, and payroll taxes.
- Excise Tax. Excise taxes are taxes required on specific goods or services like fuel, tobacco, alcohol, firearms, indoor tanning, and sport fishing. Often excise taxes are built into the price of these types of goods, and businesses that are required to collect excise taxes make quarterly payments to the IRS.
- Estimated Taxes. Many businesses and individuals must pay quarterly estimated tax payments and you can find these tax deadline schedules on our blog.
The Last Big Tax Code Update
One more side note before we get to the tax code updates for your 2020 business income tax return to cover the highlights of the Tax Cuts and Jobs Act. Since the Act is still relatively new and has long-term implications. The Tax Cuts and Jobs Act included:
- A lower corporate tax rate of 21%.
- A 20% deduction for pass-through income for owners of pass-through businesses (sole proprietorships, partnerships, and S-corps).
- The net interest deduction is limited to 30% of EBITDA and after four years, it will be capped at 30% of EBIT.
- Businesses with up to $25 million in average annual gross receipts over the prior three years will be eligible to use cash accounting (up from $5 million).
- Removal of net operating loss carrybacks and caps carryforwards at 90% of taxable income.
- Tax breaks for certain industries.
If any of these reforms bring up questions about the implications for your business, we always recommend speaking with your CPA, and if you don’t have one you can always seek ad-hoc tax consulting here.
2020/2021 Filing Season Tax Code Updates
Okay now for the main course in our discussion of tax code updates – what should business owners know about any tax law changes for filing their tax returns this year.
- Forgiven PPP loans will not be included in taxable income and are completely tax-exempt. And deductible expenses like payroll, rent, and utilities that have been paid for using funds from a PPP loan can be written off like business expenses under normal circumstances.
- Form 1099-MISC has been redesigned and form 1099-NEC for reporting nonemployee compensation has been reintroduced for the tax year 2020.
- Employee retention credits are available in 2020, even if you received a PPP loan, if your business had a 50% reduction in quarterly revenue compared to the same quarter in 2019.
- Employers who deferred payroll taxes on behalf of their employees can now withhold and pay the deferred taxes throughout 2021 instead of just within the first four months of the year.
- Net operating losses (NOLs) can now be carried forward at 100% instead of 80%.
- There is now a $300 above-the-line charitable contribution deduction for people who use the standard deduction and do not itemize deductions. For corporations, the taxable income limit has been increased from 10% to 25% when it comes to charitable contributions.
- Qualified improvement property is now eligible for bonus depreciation and a 15-year life instead of 39 years.
- Retirement plan rules have been loosened as per the SECURE Act including provisions for:
- The required minimum distribution moved from 70.5 to 72 years old.
- There is no required minimum distribution in 2020.
- If the IRA owner dies, beneficiaries can extend distributions over 10 years.
- Now any age can make IRA contributions (formerly was capped at age 70.5).
- The small employer credit for setting up a qualified retirement plan increased.
- A new credit is available for employers who set up automatic employee enrollment.
- The non-resident (1040-NR) form was redesigned to match up with the 1040 return.
- The Families First Coronavirus Response Act provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.
This outline of tax law updates is by no means exhaustive, and we encourage you to speak further with your preferred tax expert to make sure you have taken into account all tax updates that apply to your business and tax return.
2021 Brackets & Rates
In addition to updates to the tax code, a refresher on current and updated tax brackets and rates will be helpful when preparing your tax return as well. You should keep in mind the following:
- The top tax rate remains at 37% for the tax year 2021.
- Income thresholds for long-term capital gains taxes have increased.
- The standard deduction for 2020 increased to $24,800 for married filing jointly taxpayers.
- The annual exclusion for gifts remained the same at $15,000.
Filing Your 2020 Tax Return
Given the number of demanding circumstances the IRS and the government have had to take into account in 2020 and 2021 including stimulus payments and PPP loans, the IRS has established that February 12th will be the official date they will begin to accept 2020 tax returns.
With all of these minute tax code details in mind, how can you ensure that you’re successful in filing your business taxes? First, if you haven’t chosen a tax preparer yet, make sure to choose one with a PTIN which means that they are authorized to prepare a federal income tax return. Second, use the checklist provided by your registered tax return preparer to make sure you don’t miss one single, form, receipt, deduction, or credit. Third, consider filing an extension if you’re cutting it very close to the filing deadlines of 3/15 or 4/15. While you still have to pay your estimated taxes, this will ensure you can give your tax return the attention it deserves. Finally, the earlier you start the business tax return process, the more smoothly it will go (and the sooner you can put the process behind you and focus on running your business!).
Make Your Tax Move
The tax code isn’t easily understood, but Simple Startup’s tax experts have the experience and ongoing education to keep them informed on the ins and outs of tax law. AND they are prepared to go the distance to apply them to your business’s unique situation. If you’re still in need of a tax expert to cross your tax return off your to-do list, feel free to book a 15-minute consultation with our tax advisors to begin the process.