How to Adjust Year-End Tax Strategies in an Uncertain Tax Environment

How to Adjust Year-End Tax Strategies in an Uncertain Tax Environment

“Will they or won’t they?” makes for good television, but when this tension involves your tax rates and obligations, it’s much less enjoyable. Congress has the framework for a budget proposal that would increase taxes. Whether lawmakers will pass that framework is unclear. This uncertainty leaves business owners in a tricky spot for 2021 tax planning. There’s time to implement strategies, but as of the date of this publication it’s hard to know whether or when Congress will answer these questions. The following analysis describes what can be done, with reasonable certainty, in this tenuous environment.

Where We Are Today with Biden’s Tax Plan

We know that the Biden administration’s tax plan differs from the previous administration’s and that certain provisions of the 2017 tax law would be flagged for repeal. What changes the Biden administration and the slim Democratic majority in Congress would make to the tax environment has been one of the largest questions running behind the scenes of the pandemic response, and it came to a head with the recent infrastructure bill conversations. If the party aligns, a separate tax bill could be passed through budget reconciliation that would make changes to long-term capital gains taxes, individual income taxes and other items, likely toward the end of the year.

Timing of Income & Deductions

Business owners often have control over the timing of types of income, such as bonuses, billings for consulting income that are accounted for on a cash basis, retirement plan distributions that are not required distributions, gain on real estate sales and gain on investment sales. Tax rates may be going up in 2022 for high-income taxpayers, particularly for gains, which would favor strategies that accelerate income to 2021.

Tax Deductions Not Affected by the Current Legislation

To offset income in 2021, consider how you are taking advantage of the following deductions that have not been targeted for updates:

  • Operating Losses (NOLs) — NOLs generated in tax years beginning after Dec. 31, 2020 are only carried forward and can be deducted up to 80% of taxable income in a given year. NOLs generated in earlier tax years are not subject to the 80% limitation. If you have the appropriate income in 2021, the NOL carryforward should be properly categorized to support the maximum deduction.
  • Business Interest Expense Limitation — In 2021, the Section 163(j) limitation on business interest expense deductions is essentially 30% of tax-basis EBITDA. Starting in 2022, the calculations for business interest limitations change, where depreciation and amortization are no longer part of the equation (it essentially becomes EBIT), which is expected to further restrict business interest deductions.
  • State & Local Tax Deduction Limitations — The limit on state and local tax (SALT) deductions may be here to stay, and more states are creating workarounds to the so-called SALT cap. If you haven’t considered the possibility of entity-level taxes in the states in which you operate, you may want to evaluate this workaround option.

Keep in mind that individuals generally use the cash method of accounting, so expenditures are deducted in the year paid. You can choose to accelerate the timing of the payment of a deductible expense, such as those for medical costs (e.g., health insurance premiums, non-urgent medical and dental services, non-urgent prescription drugs, non-urgent mileage).

Working with your tax advisor can help you adjust your tax strategy as more insights come to light.


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How to Adjust Year-End Tax Strategies in an Uncertain Tax Environmenthttps://www.cbiz.com/Portals/0/Images/Tax Strategies.jpg?ver=dzltHU_Z3kr3EEaiYjDDEA%3d%3dCongress has the framework for a budget proposal, but don’t expect to have all the answers soon. Here’s what can be done right now to adjust year-end taxes before the deadline. 2021-10-21T19:00:00-05:00Congress has the framework for a budget proposal, but don’t expect to have all the answers soon. Here’s what can be done right now to adjust year-end taxes before the deadline. Planning & Tax MinimizationIndividualsFederal TaxPrivate Client ServicesNo