2021 Tax Moves That Will Save Your Business Money

This is a contributed article by Gene Marks, a CPA, columnist, writer, and small business expert.

This is what my smartest clients are doing. They are planning ahead. They are making their tax moves now. They know that by doing so they’ll maximize savings. This is what you should be doing too. So if this is of interest to you – and I really hope it is – consider these big tax moves right now.

#1 Take advantage of the Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a potentially huge tax benefit for employers that were impacted by COVID. The credit was sweetened thanks to the December 2020 stimulus and now extended thanks to the March 2021 stimulus bill. 

So, do you qualify?

You do if you were either shut down (or partially shut down) – even for a day – during any quarter in 2020 or 2021 because of a government directive. You will also qualify if you suffer a revenue decline of 20 percent or more in any quarter of 2021, compared to the corresponding quarter in 2019 (it’s a 50 percent decline if you’re considering the credit for a quarter in 2020). 

By the way, that's 2019, when things may have been going better, right? So it's quite possible your business does qualify.  And if it does, then you have the potential for a big check from the IRS.

Why? Because at the end of the qualifying quarter you would run through a calculation on your Federal payroll tax returns (Form 941). On that return, you would determine any employee that quarter who made up to $10,000 and then take a 70% credit on that amount (there’s a maximum $7,000 per employee per quarter). You would then apply that credit to the amount of payroll taxes (FICA, although Medicare may also qualify after June 30) you owe to reduce that liability. What happens if the amount you calculate is larger than the amount you owe? You'll get the difference back –in cash.

But, there are some complications. For example, if you received a Paycheck Protection Program (PPP) loan, you can't use the wages you're using in the forgiveness calculation to also apply for the ERTC. If you're using these wages for a credit under the Families First Coronavirus Responses Act, you can't also use them for the ERTC. If you want to go back and apply for the credit from a 2020 quarter, you can, but the rules are slightly different. For example, in 2020, you must have had less than 100 employees, while in 2021 that number was increased to 500, and the amount of the credit is lower.

The bottom line is that this refundable credit could be a big boost for your business. Make sure to talk to your accountant or payroll specialist now to figure out if you can get that money back.

#2 Use other COVID-related tax incentives

There are a myriad of very generous tax benefits available to small businesses that are also related to the pandemic.  

For example, maybe you’ve decided to continue to compensate your employees under the Families First Coronavirus Response Act. That’s the March 2020 legislation that requires employers to compensate employees for up to 12 weeks of time off taken as a result of COVID (which includes family members affected or even kids doing school from home). Doing so now is voluntary. But, there’s still a tax credit available through the remainder of 2021. 

Another big one has to do with losing money. If your business lost money in 2020 (or 2019 or 2018) you have a one-time chance – thanks to the March 2020 CARES Act – to carryback that loss for up to five years. This means if you paid taxes in any of the past five years you may get money back. Normally these carrybacks are not allowed, so this is a great opportunity.

Finally, if your business makes charitable contributions, you can deduct up to 25 percent of your taxable income this year before it reverts back to the original 10 percent limit. On a personal level, you can also deduct up to $600 if you file jointly ($300 if filing individually) for charitable contributions in 2021 above the standard deduction. If you’re running a nonprofit, this could be a good revenue-generating opportunity as well. 

#3 Use the Work Opportunity Tax Credit to provide hiring bonuses

Most economists predict an economic recovery in 2021, likely by the middle of the year. While there are still millions of people unemployed, it's forecasted that many will be returning to the workforce. Unfortunately, small businesses are going to be hard-pressed to compete with their larger competitors that can offer better, more lucrative benefits. Fortunately, there's a tax credit that can be put to good use: the Work Opportunity Tax Credit.

This credit is available to companies that hire people coming off of welfare, out of prison, from the military, or – and this is important – who have been "long term" (defined as six months) unemployed.  

This applies to a lot of people. Depending on the calculation, the credit – which is determined by each employee – can be anywhere from $1,200 to $9,600. Remember: this is a CREDIT that applies against the employer’s taxes due, regardless of whether the employer is a corporation, a partnership, or a pass-through. Sure, you can put the money in your pocket. But if you know in advance what that credit would be, you can instead offer it as a signing bonus to that prospective employee.  That may make the difference between bringing on a great asset that will benefit your business, or losing that asset to a competitor.

#4 Offer flexible time-off benefits

Flexible paid time off plans have always been in high demand from employees, and thanks to the pandemic, the demand for this type of benefit may increase.  Workers have been working from home. They've been flexible and independent. And  – it's worked! Productivity has been fine, the "cloud" has stood the test, and managers and small business owners have realized that they can leave their employees up to their own devices as long as they get the job done. For many businesses, these types of working arrangements will continue, so more flexible – even unlimited – paid time off plans will become more common.

From a tax perspective, there's an advantage if you provide paid time off as part of the government's Family and Medical Leave Act. This law, which dates back to the Clinton era, requires employers with more than 50 employees to hold their jobs and provide unpaid leave for workers who must take time off for sickness or other qualifying reasons. This law still stands, but legislation a few years ago gave employers an incentive for turning some, or all, of this unpaid leave into paid leave. 

Here’s how it works: If an employer pays at least 50 percent of a worker's compensation while they're out under the FMLA they can receive a tax credit of anywhere between 12.5 percent and 25 percent. That's a benefit you can offer that other employers may not.

Remember, it’s all about attracting great talent as the recovery continues. The more PTO benefits you can provide, the better chance you have of doing this. 

#5 Use generous government incentives to start a 401(K) plan

There's a retirement savings crisis happening in this country. According to a TD Ameritrade survey, nearly two-thirds of 40-somethings have less than $100,000 in retirement savings and 28% of those surveyed in their sixties have less than $50,000. The good news is there are plenty of tax benefits to encourage you to offer 401(K) plans if you’re smart enough to take advantage.

Thanks to the 2019 SECURE Act, you can now establish a 401(K) defined contribution plan and the government will reimburse for up to $5,000 of the cost of doing so in the form of a tax credit. In addition to that, you can receive up to a $500 tax credit per year for three years if you change your 401(K) or SIMPLE IRA plan to require automatic enrollment (employees can always opt-out, but you still get credit for trying). 

But that's not all.

You can now sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service in your retirement plan and your employees can be encouraged to work a little longer and keep their retirement savings in their accounts until the age of 72 without being subject to minimum distribution. Your employees can now also take out up to $5,000 tax-free to use for adopting a child and you can include more annuities without fear of legal liability. 

Are you taking advantage of these programs? Do you offer a retirement plan? These are critical, highly-demanded benefits and are necessary to not only keep your best people employed but attract great workers to your company.  

#6 Invest in capital equipment. Lots of it

If you decide to buy capital equipment – with the recession, there are plenty of deals on both new and used stuff – you can now take an immediate deduction of up to $1,050,000 in 2021 for the cost. It's part of the expanded rules under Section 179 of the IRS tax code, thanks to the 2017 tax reform act. Most businesses qualify for this deduction, but there are limitations. The $1,050,000 is for a single purchase. You can continue to take deductions for other purchases, but the deduction begins to phase out after a total of $2,590,000 is spent during the year and is completely phased out once you've spent $3,630,000. 

The best part of this move? You don't need to pay for it. At least not right away. You can finance your capital equipment purchases with interest rates that are currently at all-time lows. As long as you put the asset into service by the end of the year, you can take the full deduction. 

Conclusion

As shown by the above examples, there are a lot of tax incentives available for you to save big money. These examples will impact your federal taxes, but many states have similar rules. When you add up the impact of all the taxes you pay during the year, you could save as much as 20 to 30 percent of your income. This is why the smartest business owners take the time, early on, to have a tax strategy in order to minimize this expense. Of course, you should always pay the taxes you legally owe. But no smart business owner wants to pay more than what's due.