2021 Year-end planning for businesses

As of the date of this article, the "Build Back Better Act" (BBBA) has not been enacted into law. It is expected, though not certain, to be enacted by year end. If enacted, it may impact strategies on when to recognize income and expenses.

 

• 100% Bonus First-Year Depreciation – Businesses are permitted a deduction for machinery and equipment bought new or used (with some exceptions) if such purchases are placed in service this year. The 100% write-off is permitted without any proration based on the length of time an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2021.

• Heavy SUV, Pickup or Van - The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy vehicles used over 50% for business. For federal tax purposes, heavy SUVs, pickups and vans are treated as transportation equipment, so they qualify for 100% bonus depreciation. This option is available only when the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

If you’re considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a big write-off on this year’s return. Before signing the sales contract, contact our team to help evaluate what’s right for your business. Here are some of the more popular qualifying vehicles:

Audi Q7

BMW X5

Cadillac Escalade

Chevrolet Silverado

Chevrolet Tahoe

Ford F-150

GMC Sierra

GMC Yukon

Infinity QX80

Ranger Rover

Lexus GX460

Lincoln Navigator

Mercedes G Class

Nissan Titan

Ram 1500

Tesla Model X

Toyota 4Runner

Toyota Tundra

• De Minimis Safe Harbor Election – Also known as the book-tax conformity election, this election is an administrative convenience that allows businesses to deduct small-dollar (i.e., up to $2,500 or $5,000 per invoice) expenditures for the acquisition or production of property that otherwise would have to be capitalized, other than amounts paid for inventory or land.

• Cost Segregation Benefits – Cost segregation studies allocate building costs to tangible personal property so that depreciation deductions can be taken sooner rather than later. A building generally is non-residential real property (39-year property) or residential real property (27.5-year property) eligible for straight-line depreciation. Equipment, furniture and fixtures are tangible personal property that is generally depreciated over 5 or 7 years and is eligible for accelerated depreciation (e.g., double declining balance, bonus depreciation, and §179 expensing). By segregating the costs between the building and the tangible personal property, the costs allocable to the tangible personal property can be written-off sooner than the costs allocable to the building.

• Income Acceleration – Certain corporations (other than large corporations) that anticipate a small net operating loss (NOL) for 2021 and substantial net income in 2022 may find it worthwhile to accelerate just enough of its 2022 income (or to defer just enough of its 2021 deductions) to create a small amount of net income for 2021. This will permit the corporation to base its 2022 estimated income tax installments on the relatively small amount of income shown on its 2021 return, rather than having to pay estimated taxes based on 100% of its much larger 2022 taxable income.

  • To reduce 2021 taxable income, consider deferring a debt-cancellation event until 2022.

  • To reduce 2021 taxable income, consider disposing of a passive activity in 2021 if doing so will allow you to deduct suspended passive activity losses.

• Employee Retention Tax Credit – Employers who experienced a 20% or greater reduction in gross receipts in any of the first three calendar quarters in 2021 compared to the same calendar quarter in 2019, or who were subject to certain government orders due to COVID-19 may be eligible to claim a credit up to $7,000 per employee per quarter to the first three quarters of 2021.

• ERC Recovery Startup Business -Businesses who started on or after February 15, 2020 can receive an employee retention credit of up to $50,000 for Q3 and Q4 2021 (max credit of $100,000 for 2021). These businesses do not need to show a reduction in gross receipts or have been subject to a government order to qualify.

• Section 1202 Stock – For certain C corporations satisfying an active trade or business requirement, shareholders that hold original issuance stock for more than five years can be eligible to have gain on the sale of such sock excluded from tax, to the extent of the greater of $10 million or 10 times the original tax basis.

If you have any questions related to these planning techniques or would like to schedule a meeting with one of our tax partners before year end, please contact our office as soon as possible (214) 741-6721.

We look forward to working with you and your business in the new year!