For some companies, tax preparation may be more complicated this year due to persistent backlogs and staff shortages at the IRS and some tax rule changes. Additionally, the pandemic continues to impact everything from what businesses are selling to how they’re delivering goods and services and employing staff.
“Our tax environment has probably never been more dynamic both in terms of the number and the scope of change,” says Bruce McVittie, CPA, President of McVittie Tax Advisors, LLC.
Given the filing challenges this year, it is important to organize your 2021 books and be prepared when you meet with your tax advisor.
Use this checklist to get started with your important information gathering for your 2021 tax return.
Organize your records.
Step one is to make sure all of your business financials are up to date and assembled in one place. Complete, tidy records provide your tax advisor key numbers to simplify your tax prep process and help you file accurately with the greatest number of deductions possible. Gather all documents that support your expenses, such as credit card and bank statements, receipts, paid invoices and other material. This IRS page outlines many types of records and receipts you should keep for tax time. Consider using file folders, labels, clips, file boxes and other supplies to organize your records and make them easy to access. Since tax records typically include confidential information about employees and your company, store them securely, such as in a locked filing cabinet. And, make sure you have the capability to shred any documents you no longer need to keep.
Track purchases made in 2021.
You may be able to deduct purchases made by the end of 2021 during tax time, which could ultimately reduce the amount of taxes you owe. To have these items deducted, you must have made the purchases between January 1st and December 31st of the tax year.
To help your tax advisor maximize your tax deductions, craft a list of items your business purchased in 2021. Consider technology, machinery, office supplies, furniture, business vehicles, and other company-related items. If you purchased business equipment (including COVID-19 related items such as PPE and sanitizing stations), your business may qualify for the 179 deductions, up to $1 million. A bonus depreciation deduction may be available for purchases that do not qualify for the Section 179 deduction. If a new purchase qualifies for either deduction in 2021, businesses can write off and deduct 100% of the purchase price of the item for the tax year.
Discuss your COVID-19 program involvement with your tax advisor.
The Small Business Administration (SBA) authority to offer forgivable loans, grants and credits to help small businesses during the pandemic. Although most of these programs ended in 2021, businesses must report these items on their tax returns and/or may still be able to retroactively qualify for such benefits. Review SBA programs such as the ones below as a prompt to share any details with your tax advisor.
Paycheck Protection Program (PPP).
PPP loans may be forgivable, as long as certain conditions are met, such as that the funds were spent on payroll, utilities, rent or mortgage interest. If the PPP loans are forgiven, they are excluded from taxable income. Perhaps more importantly, businesses are allowed to deduct qualifying expenses paid with the forgiven PPP loan funds. Your tax advisor will be tracking guidelines set by the COVID-19 bills passed in 2020 and 2021 and the IRS website for any updates regarding what is and is not deductible. Additionally, although the PPP loan program formally ended on May 31, 2021, businesses will need to report the forgiven PPP loan and any qualifying expenses on their 2021 tax return.
Economic Injury Disaster Loans (EIDL).
While the SBA’s EIDLs themselves don’t have any special tax implications, an Emergency EIDL Grant might. Up to $10,000 of the EIDL Advance can be forgiven, and such funds are excluded taxable income.
Employee Retention Credit.
Businesses including tax-exempt organizations may still be able to retroactively claim ERTCs up to 70% of qualifying wages for each employee per quarter (up to a maximum of $7,000 per employee) against their quarterly employment taxes. Although the program formally ended on September 30, 2021, businesses can still retroactively claim a refund in 2022 of employment taxes paid in past quarters in 2021 (up through September 30, 2021) in which the business qualified for the credit by filing a Form 941-X with the IRS. It is worth noting that the businesses can take the ERTC on qualifying wages that are not counted as payroll costs for purposes of obtaining PPP loan forgiveness.
Deferral of Employer Payroll Taxes.
Employers were able to delay payment of the employer portion of payroll taxes incurred after March 27, 2020 through December 31, 2020. Self-employed individuals were also able to defer payment of certain self-employment taxes. Under the rules, 50% of the amount of the deferred payroll taxes were required to be repaid on January 3, 2022, with the remaining 50% due January 3, 2023. Therefore, businesses that took advantage of this deferral must ensure they remit the other 50% of the deferred payroll taxes to the IRS by January 3, 2023.
Review potential deductions
Businesses can minimize their taxes owed by taking tax deductions on their 2021 return. For example, partnerships, sole proprietorships, and S-corporations are eligible for a deduction up to 20% on their qualified business income (“QBI Deduction”). Individuals who are owners of these entities take the QBI deduction on their personal return. Please consult with your tax advisor on whether your business can qualify for the QBI deduction.
In addition, companies that were formed in 2021 can immediately deduct up to $5,000 of their qualifying start-up and organizational costs (and amortize any costs in excess of the $5,000). While small, this deduction can reduce the company’s taxes and provide them with much-needed cash to expand their operations.
Consider all charitable donations.
Many people have continued to respond to the challenges of the pandemic by giving to others in 2021. Be sure your generosity is reflected in your taxes by assembling receipts for any contributions you made, financial or other. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the favorable changes to charitable contributions originally made under the CARES Act through to 2021. Specifically, C corporations may deduct qualified cash contributions of up to 25% of their taxable income (rather than the customary 10%) made during 2021 to qualifying organizations. Contributions in excess of this can be carried over for up to five years. Individuals who itemize on their personal return and receive business income through sole proprietorships, partnerships, or S-corporations are also able to deduct charitable contributions flowing to them up to 100% of the individual's adjusted gross income. Your tax professional can help you determine what donations qualify.
Review credits.
Your business may be eligible for a number of tax credits — these lower your tax bill dollar for dollar, unlike tax deductions that reduce the amount of income you pay taxes on. For example, businesses can take an R&D credit equal to qualified research expenditures incurred by the business during 2021. Additionally, the American Rescue Plan Act of 2021 provides tax credits for small and midsize employers that offered paid leave to employees related to COVID-19 vaccinations between April 1, 2021, and September 30, 2021. Review this list from the IRS to see what other credits are available so you can bring them to the attention of your tax provider. Some of the most commonly taken by small companies include the Small Employer Health Insurance Premium Credit and the Work Opportunity Tax Credit.
Consider retirement plans.
Increasing your contributions to — or establishing — a tax-deferred retirement plan may reduce your taxable income and help you and your team save for the future. There are numerous options to explore. The tax implications are just one aspect of retirement plans, of course. Employee retirement plans can help you attract and retain top talent too.
Know the key dates.
Mark tax-related deadlines in a calendar and set up reminders. W-2s, 1099s and related forms are generally due by Jan. 31, the same deadline for furnishing copies of these forms to employees. Be aware that non-employee compensation is now reported on a 1099-NEC and there are penalties for not filing. Your tax advisor can advise you on when your returns are due.
Preparing for year-end is important for tax preparation. It also makes sense to check in regularly with your tax advisor during the year so that you’re making informed decisions all year long. “It is very difficult and often very expensive to change how something will be taxed after the activity has occurred. Proactively planning for it can increase the potential for favorable treatment,” says McVittie. “Tax laws change and new regulations are issued. Opportunities do arise and you don’t want to miss out.”
Staples does not provide tax or legal advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax or legal advice. You should consult your own tax or legal advisor regarding your specific situation.
