By Len Green, CPA and John Wollenberg, CPA
In horse racing, the competition is not over until the horse has crossed the finish line. The same goes for maximizing your tax deductions and minimizing your taxes. For those who think it’s too late to save on your 2021 taxes, we’re here to tell you no!
With over 40 years of experience in saving our clients’ taxes as well as our knowledge of new tax laws, we are confident that the following information will help you as you approach the home stretch of 2021 and enable you to win.
Impact of recent tax laws on the horse industry
Recent tax laws contain favorable developments for the depreciation and expensing of yearlings, breeders, farm equipment and other property.
- Amortization bonus: An increase in bonus amortization allows a write-off to increase from 50% to 100%. As a result, you are now allowed to charge first year purchases for yearlings, breeders and farm equipment. Second-hand goods can now also be eligible.
There are still a few weeks left for asset additions in 2021 with the potential benefit of a full tax deduction.
- IRC Â§179 Deduction: The maximum amount that may be expensed has been increased from $ 500,000 to $ 1,050,000. The elimination threshold has been increased from $ 2 million to $ 2.6 million.
- Agricultural equipment: The useful life has been reduced from seven years to five years and the 200% declining balance method can now be used.
- Race horses: Some thoroughbreds can still be depreciated over 3 years. Even if commercial equipment (or horses) are purchased before the end of the year, they still enjoy tax benefits.
2021 Year-End Tax Planning Strategies
With the new administration in our nation’s capital and uncertainty over whether proposed changes to the tax laws will be forthcoming, year-end tax planning for 2021 is more important than ever.
Steps available for individual taxpayers
- Capital gains: President Biden is proposing, for the coming years, a 20% to 39.6% increase in capital gains for taxpayers with incomes above $ 1 million. Therefore, if you are considering a sale of horses or real estate, you should consider speeding up the transaction in 2021 rather than waiting until 2022.
Even for taxpayers with income below the $ 1 million threshold, if you realized capital gains in 2021, as well as unrealized losses, you may want to trigger those losses before the end of the year to offset your earnings, thereby reducing your tax payable.
On the other hand, if you have incurred losses, consider realizing gains, as the capital loss deduction is limited to $ 3,000 in any given year.
- Alerts on pension plans: First, the minimum required distributions are restored for the year 2021. Make sure you have enough taxes withheld.
Second, plan members who turn 70 and a half in 2021 or later do not need to receive the required distributions until the year they turn 72.
Third, you are now allowed to contribute to a traditional IRA after the age of 70 and a half as long as you have earned income.
Fourth, contributions to a Keogh plan or 401 (k) plan for one person can be significant and save you substantial 2021 taxes if put in place before December 31, 2021.
Another flexible alternative is a SEP-IRA. A SEP can be set up before the filing date of your 2021 tax return, while providing you with a 2021 deduction.
- Avoid underpayment of the estimated tax penalty: If you haven’t prepared an income tax projection for 2021, you should ask your advisor to do so. If your 2021 projection shows a balance owing, request that a disproportionate amount of withholding be taken from your December paychecks, year-end bonuses, or pension plan distribution, rather than paying a comparable significant amount. with a tax voucher estimated in the fourth quarter.
This withholding approach is more favorable than writing a check, because taxes withheld in December are deemed to be ârejectedâ and treated as evenly distributed over the calendar year. This allows you to make up for any shortfall while avoiding a penalty in the first three quarters.
- Commercial losses: Importantly, business losses in 2021 are capped at $ 262,500 for single taxpayers and $ 524,000 for joint returns. Please take these loss limits into account when preparing your 2021 income tax projections.
- Maximize the middle business income deduction: This tax deduction allows certain taxpayers to deduct 20% of their qualifying business income. To maximize the deduction, you must take steps to qualify your taxable income so that it is below the phase-out thresholds of these new provisions.
- Charitable donations: Unspecified married couples who jointly deposit can now deduct up to $ 600 in charity cash for 2021.
Steps available to commercial taxpayers
- Maximize the available amortization: Businesses should consider making expenses that qualify for 100% bonus amortization in the first year. As a general rule, new and used depreciable assets are eligible. Full write-off of the first year is allowed even if the asset is purchased late in the year and even if the deduction results in a taxable loss.
Also make sure that you get a depreciation bonus on all qualifying assets. Often, property is overlooked with respect to leasehold improvements for horses purchased at overseas sales or horses put into training but not yet raced.
An alternative is IRC Â§179 Amortization, where for 2021, the spending limit has been raised to $ 1,050,000 if investment purchases do not exceed $ 2,600,000. Keep in mind that the expensing of Â§179 cannot give rise to a loss.
- Qualifying Business Income Deduction (QBID): Some business owners may be entitled to a deduction of up to 20% of their qualifying business income. You must take all possible measures to keep your taxable income below the phase-out thresholds. The rules are complex, so contact your tax advisor so they can help you maximize the use of the QBID.
- Active business requirements:
- Manage your equestrian activities in a professional manner. We go so far as to recommend that you create a limited liability company (LLC) before the end of the year and have a separate checkbook. Keep a record of your equestrian business activities.
- Consult with a person knowledgeable in the horse industry to determine if you are completing any of the nine “to qualify” as “active” tests and therefore put yourself in a position to “take full advantage” of any tax loss you may incur.
Possible changes to tax laws proposed by the Biden administration
The best way to sum up President Joe Biden’s tax plan would be to say that he wants to raise taxes on “high income” households and businesses.
- Increase the corporate tax rate – The existing tax plan lowered the corporate rate from 35% to 21%. While Biden’s camp generally agrees that 35% was too high, the 21% rate will soon be raised, perhaps to 26.5%.
- Increase taxes on high incomes – Biden would reinstate the top marginal tax rate of 39.6% that was in effect before tax year 2018.
- Phase out the impact deduction – Biden would phase out the 20% QBI deduction for taxpayers earning $ 400,000 or more.
- Increase capital gains tax for high incomes – Currently, capital gains enjoy lower tax rates than ordinary income, but Biden would change that for taxpayers earning more than $ 1 million.
- Increase social security contributions – Biden would increase Social Security income by imposing the 12.4% payroll tax (half of which is paid by the taxpayer) on all income over $ 400,000 in addition to the current tax structure.
- Changes in estate planning – This part of the proposed plan is less “simple”. On the one hand, you have the $ 11.7 million inheritance tax exemption reduced by 50%. On the other hand, there is less clarity on the important elements such as the increase of the base, the exemptions of goodwill, the capital gains, etc.
It is clear that there will be changes, adjustments and modifications during the “negotiation period” before any changes are implemented. Also note that it is highly unlikely that new laws will be passed retroactively to 2021. Our best advice is to keep an open line of communication with your tax and financial advisers before updating your estate planning.
The Green Group looks forward to the opportunity to discuss your 2021 year-end tax savings strategies with you by phone at (732) 634-5100 and to ask Len Green, CPA, John Wollenberg, CPA, Ava Agbulos, CPA, Jeff Greene, CPA or Tracy Zhang, CPA.
In the meantime, be well.