Three Tax Planning Tips for 2021
As the 2021 calendar year comes to a close, it’s important to keep your eyes open on tax changes so you can be prepared for the filing season. Here are some important planning tips:
1. Deduct Business Meals
The treatment of business meals and entertainment (either through a business entity or through an individual’s sole proprietorship) has changed significantly since the Tax Cuts and Jobs Act of 2017 (TCJA). Prior to that law, meals and entertainment expenses were generally deductible by the taxpayer at 50% of their cost in most cases. The TCJA changed this rule to completely disallow deductions for entertainment but keep the 50% limitation for business meals. However, as a COVID relief measure, the Consolidated Appropriations Act of 2021 (CAA) made a special exception for meals.
Any business meals expenses paid or incurred after December 31, 2020 and before January 1, 2023, are deductible at 100%, so long as they are purchased from a restaurant. Business taxpayers planning end-of-year holiday parties or get-togethers with clients should consider this when planning their meals.
2. Review Business Loss Rule Expirations
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) made several important rule changes from the TCJA, and some of these rule changes expire in the 2021 tax year. First, the excess business loss limitation rules, which were suspended through 2020 by the CARES Act, will be restored in 2021, absent further legislation from Congress. For 2021, non-corporate taxpayers are limited to a business loss of $262,000 (or $524,000 for a joint return).
This can include operating businesses, farming, losses passed through from a partnership or S corporation, or rental businesses. Any excess losses cannot be used to offset other income and must be carried to the next tax year.
3. Know Net Operating Losses Rule Suspension
Another suspended rule by the CARES Act that is coming back into force is the change to the treatment of net operating losses (NOLs) by taxpayers. Under rules prior to the TCJA (tax years before 2018), an NOL could be carried back two tax years, then carried forward 20 years, and could offset 100% of taxable income. The CARES Act changed the rules for losses generated in the 2018, 2019, and 2020 tax years, by which they could be carried back five years, and then carried forward indefinitely, offsetting 100% of taxable income. Starting in 2021, however, the rules as originally intended by the TCJA take effect.
Specifically, an NOL cannot be carried back, can be carried forward indefinitely, and may only offset 80% of a taxpayer’s taxable income for the carryforward years. Taxpayers who have losses in 2021 should be aware that those losses will have a limited tax benefit in future years.
It's important to know that Congress may change some of these provisions before the end of the year for COVID relief purposes. If that happens, we at MRPR stand ready to help you.