Don’t Miss Midyear Tax Planning Opportunities
Valuable tax planning opportunities exist if you anticipate potential tax changes and take advantage of what’s still available under the Tax Cuts and Jobs Act, CARES Act, and other tax provisions. The American Rescue Plan Act enacted earlier this year included changes that will affect 2021 tax returns and, if enacted, the proposed American Jobs Plan and the American Families Plan could both contain provisions that will impact 2021 tax returns. Are you ready for an increase in the capital gains rate that might be retroactive? Whether you are a business or an individual, being proactive can save you $$$$ – here are some ideas.
- The TCJA deduction for foreign-derived intangible income is often an overlooked tax benefit. It’s not just geared toward products sold overseas using U.S. intellectual property, it’s potentially available for any domestic corporation that sells, licenses or leases any products to any foreign entity for use outside the United States. It may be a benefit that disappears under the Biden administration, so use it now if you can.
- The TCJA’s Global Intangible Low Taxed Income (GILTI) rules attempted to coax U.S.-based multinational businesses back from sheltering their profits in lower-tax jurisdictions overseas. The new tax rules featured a 10.5% statutory rate with a 50% earnings deduction, an exclusion of 10% return on foreign tangible assets, and the ability to pool foreign profits, losses and tax credits for a company’s U.S. tax bill. Careful planning with foreign tax credits and an assessment whether a retroactive election for the high-tax exception in the regulations could result in a prior-year refund. There also may be planning opportunities to benefit from rate arbitrage by adjusting the timing of items before an increase in the GILTI rate.
- The R&D credit is still underused. Many taxpayers leave money on the table because they don’t understand how broadly the credit can apply. See our prior article HERE: https://www.fuoco.cpa/surprising-tax-saving-expenses-eligible-for-rd-credits/. Beginning in 2022, the federal research tax credit must be amortized: over a 5 year period if incurred inside the U.S., or a 15 year period if incurred outside the U.S. Taxpayers may need to begin preparing to track these costs now in order to be able to comply for 2022. A bill is being proposed which would repeal mandatory capitalization of R&D costs.
- Meals and entertainment deductibility has taken a roller coaster ride due to TCJA and CARES Act changes. The TCJA repealed any deduction for entertainment expenses but left a 50% deduction for meals. The CARES Act raised the deduction to a full 100% to help restaurants return to normal in 2021 and 2022. Businesses should have tracking systems in place to identify which meal costs may be eligible for a 50% deduction or a 100% deduction.
- There are significant tax refund opportunities regarding sales and use tax – look at your state and local compliance. Many states and localities offer sales and use tax exemptions from machinery and equipment or from property purchased for further manufacture or resale. If your company makes frequent or large purchases, perhaps consider a review of purchases to identify if any exemptions might apply.
- Check out our update on the Employee Retention Credit, which has been extended and enhanced, HERE: https://www.fuoco.cpa/employee-retention-tax-credits-available-thru-december-2021/. The IRS has interpreted the rules generously, so that if remote employees are getting their full salaries but are not performing full services, the employer can claim the credit for them as well.
- The 3d round of Economic Impact Payments will impact 2021 returns. So if you haven’t received yours, examine why! It should be based on your 2019 return, but if it was paid based on the 2019 return and your 2020 return is filed by August 17, 2021, you might get a second check if they were entitled to more based on their 2020 return.
- The American Rescue Plan expanded the Child Tax Credit for 2021, with up to $3,600 per child under the age of six, and $3,000 for those ages six to 17. The credit is fully refundable, and will be mailed in monthly installments of up to $300 per child from July 15th through December 15th. There is an IRS portal to report a child born in 2021. Just remember, if a taxpayer receives more than they were entitled to, they have to pay it back.
- Recent college graduates might qualify for the Earned Income Tax Credit, since the American Rescue Plan expanded the EITC for 2021 primarily for childless low-income individuals.
- For the 2021 tax year, the Child and Dependent Care Credit can get you up to 50% of up to $8,000 of child care and similar costs for a child under 13, a spouse or parent who cannot care for themselves, or another dependent so that you can work (and up to $16,000 of expenses for two or more dependents). Be sure to document care providers to qualify for the Dependent Care Credit – you will need to prove how much care was provided and have the ID number of the provider. Summer day camp counts!
- Be prepared for an increase in the capital gains rate that might be retroactive! Under the Biden plan, capital gains for those earning more than $1 million would be taxed at their marginal tax rate, which is currently 37% and which the administration hopes to increase to 39.6% in 2022. Those taxpayers would also have to continue paying the 3.8% Medicare surtax on capital gains, bringing the total levy to 40.4% in 2021 and 43.4% in 2022. The key to avoiding the higher capital gains tax is to keep income below $1 million, but any pre-emptive moves should not inflict harm if the tax hike doesn’t pass, which is also a possibility.
- If proceeds from a sale (business or asset) are being paid out in increments over several years, perhaps elect out of the installment tax payment plan and pay the full tax liability this year.
- If planning a big sale sometime soon, consider doing it this year instead of next year.
- Use other traditional methods to reduce tax liability like increasing retirement plan contributions, deferring other income, harvesting tax losses and making charitable contributions, including securities, to a donor-advised fund.
- Structure future sales to keep as much of the proceeds, combined with a taxpayer’s income, under $1 million for any given year to avoid the higher capital gains tax. String out payments to keep income under $1 million and pay just 20% on capital gains instead of the higher income tax rate.
Contact Us: This is just the tip of the iceberg. Financial transactions can be negatively impacted by “tax drag” if appropriate tax planning isn’t conducted beforehand. With potentially significant changes to the tax landscape looming, we want to take stock of our clients’ financial health now, especially for those who are most at-risk.