As small and mid-size business owners move toward the federal tax filing deadline in this new year, they need to be aware of certain changes in the federal income tax area. A short listing of the highlights (more appropriately, lowlights) of those changes is outlined below.
DEFERRED 2020 EMPLOYER SOCIAL SECURITY TAXES ARE DUE (OR PAST DUE)
Under the CARES Act, employers were given the opportunity to defer deposits of the employer portion of Social Security due between March 27, 2020 through Dec. 31, 2020. The act provided only a deferral, not a waiver, and required payment of one half these taxes by Dec. 31, 2021 and the other half by Dec. 31, 2022. Employers should have received an IRS notice of the amount due prior to the 2021 payment due date.
The IRS has announced that it intends strict enforcement of the payment deadline, even if employers didn’t receive such a notice, including disallowance of the entire deferral, and penalties will be assessed based on the original due date. Employers falling into this category need to contact their tax advisors immediately to avoid further penalties. KJK has extensive experience dealing with payroll tax disputes and can provide assistance in this area.
EMPLOYEE RETENTION CREDIT
The Infrastructure Bill enacted in 2020 surprisingly eliminated the ability for employers to claim the 2021 fourth quarter employee retention credit. Employers who nonetheless claimed the credit have, under a recent IRS Notice, the opportunity to avoid penalties if they repay the payroll taxes (calculated without the credit) by the due date of their fourth quarter 2021 payroll tax return.
NET OPERATING LOSS RULES
Due to the pandemic-induced reduction in business activity, the fact that Paycheck Protection Program (PPP) debt forgiveness was non-taxable, coupled with the deductibility of PPP expenses, net operating losses (NOL’s) became ubiquitous in 2020. However, the rules governing the use of NOL’s have changed for 2021. NOL’s generated in 2018, 2019 or 2020 carried forward into the 2021 tax year will be limited to 80% of taxable income. NOL’s generated prior to 2018 are not subject to the limitation.
EXCESS BUSINESS LOSS LIMITATION RULES ARE BACK
Under the Tax Cuts and Jobs Act of 2017 (TCJA), the ability of individuals to deduct business losses was limited for higher income taxpayers. That law was supposed to apply to the 2018 through the 2020 tax years but was lifted as part of the CARES Act pandemic assistance program. The ability to deduct all business losses with no limitations allowed taxpayers to create NOL’s and potentially to carry them back five years and forward indefinitely providing a potentially significant cash benefit during the pandemic. For the 2021 tax year, the business loss limitation fully applies. That means that such losses in excess of $524,000 for joint filers ($262,000 for single filers) will be non-deductible and will have to be carried forward.
The CARES Act allowed taxpayers itemizing their deductions to elect to increase the amount of their charitable contributions to 100% of AGI, as opposed to the traditional 60%. This increased limitation was permitted under that Act for 2020 and 2021 but will revert to 60% this year.
Despite the foregoing, there is one slight slowly sinking bright spot: when business owners meet with their tax advisors, the full amount of the bill for the food and drink will still be 100% deductible.