Last week we talked about tax planning for individuals based on the potential changes in Washington. Today I want to talk about business tax planning. Just like individuals, this year may be the time to recognize income and delay deductions which is different than a normal year.
Might there be changes to income tax rates?
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- Yes. Since many small businesses are set up in a way that their income flows onto their individual tax returns, the rate increases that we talked about last week will apply to business income. Some of the rate increases may be up by 7% or more.
What about businesses that pay their own taxes?
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- These c-corporations are also looking at tax increases from 21% to 28% and the addition of a minimum tax.
Last week we talked about the Qualified Income Deduction. I understand that any changes to that would affect business income.
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- This is a 20% deduction based on certain business income.
- The proposal is looking to limit this deduction for higher-income business owners.
- This would go hand in hand with the corporate tax increase they are looking at.
So those are good reasons to have higher income this year, but what about businesses who are looking to decrease their income?
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- Depreciation and retirement planning are still probably the best ways.
Let’s start with depreciation?
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- When a business purchases an asset that may last longer than one year, they need to take the deduction over its useful life. But the business may be able to elect to take the entire deduction in the first year. This is the Section 179 deduction that many business owners are aware of.
- I bring this up because normally a business could wait until December to buy an asset and as long as they start using it before the end of the year, they could take a deduction.
- But this year with all the product shortages, the manufacturer may need a longer lead time to get the company what they ordered.
- If the asset is not placed into service by the end of the year, the deduction cannot be taken.
You also mentioned retirement plans.
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- Yes, contributing money to your retirement plan and doing matching contributions for your employees is a great way to save on taxes.
- There are many different types of plans. It just depends on what plan fits best with that company.
Be sure to talk to a tax professional if you have any questions about Business Tax Planning in 2021 or would like further assistance.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
