As the 2021 year is coming to a close, we wanted to share some tax planning tips for corporations to consider.
Business Meals
For 2021 and 2022 only, the cost of most business meals provided by restaurants can be deducted 100% (business meals historically are only 50% deductible).
Charitable Contributions
Corporations can deduct charitable contributions up to 25% of their taxable income in 2020 and 2021 (this amount was 10% of taxable income in 2019). The increased 25% limit can also apply to businesses that donate food inventory they take the enhanced deduction.
Net Operating Loss (NOL)
For tax years 2021 and going forward, corporations can only use 80% of net operating loss available to offset against their income. This limitation was temporarily suspended 2018, 2019, and 2020. In, addition, the allowance of net operating loss carrybacks is no longer available staring in 2021 (for 2018, 2019, & 2020 companies were allowed to carryback their NOL’s five years).
Business Interest expense limitation under 163(j)
The Tax Cuts Jobs Act imposed a limitation for business interest expense based on 30 percent of a taxpayer’s adjusted taxable income The CARES Act which was enacted into law on March 27, 2020, modified the percentage amount for tax years beginning in 2019 and 2020 by raising the percentage of adjusted taxable income from 30 percent to 50 percent for corporations. For tax years 2021, interest expense will be limited to 30% of adjusted taxable income.
Currently adjusted taxable income for purpose of 163J is calculated by adding back interest expense, depreciation, and amortization to taxable income. For tax years after January 1, 2022 , depreciation and amortization will not be added back to taxable income to calculate adjusted taxable income.
Depreciation & Other Capital Expenditure Deductions
Taxpayers can maximize their capital expenditures by taking advantage of one of the following tax provisions
(1) Bonus Depreciation or
(2) Section 179 expense election.
Bonus Depreciation
Bonus depreciation allows a company the ability to immediately deduct 100% of the cost of the acquisition of property. It applies to depreciable business assets with a tax recovery period of 20 years or less, which includes machinery & equipment, furniture, and computer software (off-the shelf software). Purchases of both new and used qualifying property are eligible for bonus deprecation. If a company is considering making large capital purchases in the near term, they should consider purchasing and placing in service bonus eligible property before the year-end to be able to deduct 100% of the cost of the qualifying property in 2021.
Section 179
The section 179 deduction limit for 2021 is $1,050,000 (it gets indexed for inflation every year). It allows companies to write off eligible purchases as an expense against taxable income. The section 179 deduction is phased out dollar for dollar once these purchases exceed $2.62 million. The expense amount is zero once eligible purchases reach $3.67 million. The deduction is available for both new and used equipment purchases. Section 179 property consist of tangible property, computer software, improvements to a non-residential building such as fire protection and alarm system, security system, HVAC, or a new roof. As with bonus depreciation, if a company purchases qualifying Section 179 property by year-end and the 179 property is placed in service by year-end, they can immediately expense the property in the year purchased.
Other Capital Expenditure Write off Provisions
De minimis Safe Harbor Election
An elective provision that allows taxpayers to deduct for tax purposes low-cost purchases of tangible property to the extent that those amounts are deducted for financial statement purposes, or according to the taxpayer’s books and records. The max amount that can be deducted per invoice for taxpayers without an applicable financial statement (“AFS”) is $2,500. For taxpayers that issue an AFS, which is generally a financial statement filed with the SEC, or audited financial statement, among others. The max threshold is $5,000 per invoice. Taxpayers without an AFS are not required to have a written capitalization policy, but they must expense for book purposes in the taxable year in accordance with a consistent accounting procedure or policy in place at the beginning of the year. Taxpayers with an AFS must have a written capitalization policy in place at the beginning of the year. Now is a good time for taxpayers to assess their capitalization policies in order to maximize the ability to expense low-cost capital purchases under the de minimis safe harbor election.
Repairs
Taxpayers should review their fixed asset additions to see if any amounts treated as a capital improvement can be written off under the tangible property regulations as a repair. Building or leasehold improvements are the best place to look for repair deductions. Under the TPR, the building is broken down into the building structure and its key components. If the work being done is insubstantial to the overall building structure or key component there is a chance the cost can be written off as a repair, instead of been capitalized.
Credits
Research and Development Credit
Taxpayers that have invested time, money, and resources towards the development of new or improved products, or processes, may qualify for the R & D Credit. The R & D credit is a 20% credit based on a company’s qualified R & D expenses. The R &D credit can be utilized to offset taxes. If the R & D Credit cannot be currently utilized due to net operating loss carryovers, it can be carried forward for 20 years. A company can take a credit for all open years – three years (amended return opportunity).
Employee Retention Credits
The employee retention credit ended on September 30, 2021. It was originally supposed to go to the end of 2021. But the ERC for the fourth quarter of 2021 was eliminated for all companies except for a recovery start up business upon the passage of the Infrastructure Bill. Taxpayers whose operations were affected by COVID-19, either due to a significant decline in gross receipts, or a government shutdown can still file amended returns for 2020 or 2021 and claim these credits on a form 941-X. The max credit for 2020 was $5,000 per employee, and for 2021 $21,000 per employee. A taxpayer cannot claim the ERC on the same wages that were part of a PPP loan forgiveness application.
Work Opportunity Credits
A Federal credit available to employers for hiring individuals from targeted groups that face barriers to employment.
Small Business Retirement Plan Credit
Available to eligible employers who had fewer than one hundred employee and meet some other criteria may claim a credit up to $5,000, for three years for the start-up costs of starting a SEP, Simple Plan, or a qualified plan like a 401(k) plan.
Miscellaneous
Corporations (including S Corporations) are required to hold annual meetings. Most corporations hold these meetings which are sometimes called “annual stockholder meetings” after their year-end at a time and place set forth in the corporation by-laws. Corporations should document these meetings in minutes that serve as a record to document the business annal meeting.
