How to Do Business Tax Planning in 2021

This year business owners can potentially save a lot of money on taxes. Although you’ll hear mostly about tax increases, this only makes the potential tax savings all the more for those who plan accordingly. Basic business tax planning strategies for 2021 include credits such as Emergency Sick Leave, Family and Medical Leave, FFCRA Health Insurance, 100% Deductible Meals, ERTC and Section 139 Disaster Relief. This article takes a closer look at some of these lucrative tax savings opportunities.

The Paid Sick Leave and Family Leave Credit 

Beginning in the spring of last year, businesses were able to receive a tax credit in exchange for offering paid sick and family leave. Offering paid leave was mandatory for much of 2020, but businesses could offer to provide paid leave to their employees in 2021 and keep receiving the credit. The ARP bill extended this eligibility period from March 31, 2021 to the end of September 2021.

The Employee Retention Credit (ERTC) 

The Employee Retention Credit (ERC) was expanded at the end of 2020, but the ARP broadened eligibility for businesses even further. Under the previous guidelines, employers with more than 500 employees were not even eligible for the tax credit. Under the new ARP, employers with a 90% or higher reduction in gross receipts may qualify for the ERC even if they have greater than 500 employees.

The ARP also extended the ERC through December 31, 2021. Now, businesses can receive up to $7,000 per employee in all four quarters of 2021, for a maximum credit of $28,000 per employee this year. 

Qualified Business Income Deduction

The 20% qualified business income deduction for pass-through entities is going to expire after 2025, but it could help this year for business owners with an income of $400,000 or more. This deduction was part of the TCJA that still affects many business owners across the country. The proposed change would increase the top tax rate on pass-through income by around 10%.

Changing Corporate Entity to Save on Taxes

C Corporation businesses could see an increase in corporate tax rate this year. The TCJA had reduced the top corporate tax rate from 35% to 21%, but Biden’s plan could increase the corporate tax rate back from 21% to 28%. It can be worth looking into whether an entity change could bring tax savings.

The CARES Act and PPP

Businesses have seen many new tax incentives recently as the government continues to fight COVID-19. The CARES Act introduced the Paycheck Protection Program (PPP) as an emergency loan that allocated money to small businesses. There was a 2nd PPP draw in 2021 and it also is a forgivable loan, so long as the funds are utilized appropriately. It’s possible any money a business received in 2021 through the PPP is not considered taxable income. Business owners can also deduct the expenses paid from the PPP funds.

Use the EIDL 

The targeted EIDL advances in 2021 under the ARP were earmarked only for businesses in low-income communities that saw at least a 30% decrease in revenues during an 8-week period between March 2, 2020 and December 31, 2021 as compared to the 8-week period immediately preceding March 2, 2020. These businesses must have no more than 300 employees—and the ARP prioritizes the funding as followed:

1. Businesses who have already applied under the prior iteration of the program but were denied support due to lack of funding. Under the prior program, these businesses could receive up to $10,000 of grant revenue based on the number of employees.
2. Businesses that saw at least a 50% decline in revenues and that have no more than 10 employees. They can get grants of up to $5,000.
3. Businesses that saw at least a 30% decline in revenues and that have no more than 10 employees. They can also get funds of up to $5,000.
4. All other eligible businesses

EIDL advances are not taxable in 2021 for businesses.

Shuttered Venue Operators Grant

The ARP under President Biden boosted the Shuttered Venue Operators Grant (SVOG) program by $1.25 billion. Live venue operators like movie theaters, museums, concert venues, zoos, and performing arts centers that were in operation as of February 29, 2020 could receive grants equal to 45% of the gross revenue they earned in 2019, up to a max of $10 million.

Funds excludes expenses used for:

• Buying real estate;
• Making payments on loans that originated after February 15, 2020;
• Making investments;
• Loaning money to other businesses or individuals; or
• Contributing to a political party.

SVOG funds are not taxable, and all otherwise deductible expenses paid for with SVOG funds will continue to be tax deductible.

Restaurant Revitalization Fund 

The Restaurant Revitalization Fund (RRF) is a program available to most American restaurants, including bars, food trucks, and lounges. Though not available to all businesses, a restaurant-specific grant was made since the food service industry was hit hard by the pandemic.

Businesses will need to prove that they lost revenue in 2020 compared to 2019. Restaurants that receive a grant will not have those funds be taxable, but they will need to prove they used the funds only on pre-approved expenses that occurred between February 15, 2020 and the end of 2021. 

Allowable expenses include payroll (including paid sick leave), mortgage or rent payments, utilities, supplies, inventory, and others.

Business Tax Planning in 2021 is Vital 

Between the ERTC, CARES and paid sick/family leave, the pandemic is still bringing a wide swath of tax savings for those who plan carefully. More changes may affect business taxes in 2021 as new bills come out, so it’s important to check again before doing any end of year business tax planning in 2021. Corvee Tax Planning software takes into account the most recent tax policies so you can easily create tax plans for either businesses or individuals in 2021. Features include the ability to instantly calculate over 60 tax planning strategies and the convenience of creating ready-to-send proposals with a click of a button.