Tax laws

Businesses Must Navigate Year-End Tax Planning With Potentially New Tax Laws On The Horizon – Tax


The end of the fiscal year is fast approaching for many businesses, but their ability to engage in traditional year-end planning may be hampered by the specter of impending tax legislation. The budget reconciliation bill, dubbed the Build Back Better Act (BBBA), is expected to include provisions affecting corporate taxation – although its passage is uncertain at this time.

While it appears that several of the most disadvantageous provisions targeting businesses will not be in the final bill, others may. In addition, some temporary provisions are coming to an end, forcing companies to act before the end of the year to take advantage of them. As Congress continues to negotiate the final bill, here are a few areas where you could take action now to lower your company’s tax bill in 2021.

Research and experimentation

Section 174 research and experimentation (R&E) expenses generally refer to research and development expenses in the experimental or laboratory sense. They include the costs associated with activities aimed at uncovering information that would eliminate uncertainty about the development or improvement of a product.

Currently, companies can deduct R&E expenses in the year they are incurred or paid. Alternatively, they can capitalize and amortize the costs over at least five years. Software development costs can also be immediately expensed, amortized over five years from the date of completion, or amortized over three years from the date the software is put into service.

However, under the Tax Cuts and Jobs Act (TCJA), this tax treatment must expire after 2021. Starting next year, you cannot deduct R&E costs in the year incurred. Instead, you must amortize expenses incurred in the United States over five years and expenses incurred outside the country over 15 years. In addition, the TCJA requires that software development costs be treated as Sec. 174 expenses.

The BBBA may include a provision that delays funding and amortization requirements to 2026, but that’s far from certain. You might consider ramping up research spending until 2021 to maximize your deductions and reduce the amount you might need to start funding from next year.

Income and expense schedule

Speeding up spending in the current tax year and deferring income until the next year is a proven tax reduction strategy for businesses that use cash accounting. For example, businesses can defer billing until later in December, stock up on supplies, and speed up premium payments. This strategy is only recommended for companies that expect to be in the same tax bracket or in a lower tax bracket the following year – and you can expect larger profits in 2022, then let the pandemic end hopefully. If so, your deductions could be worth more next year, so you’ll want to delay spending, while speeding up your income collection. In addition, under certain provisions proposed in the BBBA, some companies may find themselves facing higher tax rates in 2022.

For example, the BBBA may extend the Net Investment Income Tax (NIIT) to include active business income from intermediary businesses. Intermediate business owners – who report their business income on their personal income tax returns – could also be subject to a new 5% “surtax” on modified adjusted gross income (MAGI) that exceeds $ 10 million. , with an additional 3% on income over $ 25 million.

Fixed assets

The traditional approach of making capital purchases before the end of the year remains effective in reducing taxes in 2021, given the timing issues discussed above. Businesses can deduct 100% of the cost of qualifying new and used property (under certain conditions) in the year the property is put into service.

You can take advantage of this depreciation premium by purchasing, among other things, computer systems, software, vehicles, machinery, equipment and office furniture. Bonus amortization is also available for qualifying improvement properties (typically interior improvements to non-residential real estate) placed in service this year. Special rules apply to goods with a longer production period.

Of course, if you face higher tax rates in the future, the capital cost allowances will be worth more in the future. The good news is that you can buy a qualifying property before the end of the year, but wait until your tax deadline, including any extensions, to determine the optimal approach.

You can also reduce your taxes in 2021 with Sec. 179 expense (by deducting the total cost). It is available for many types of improvements to non-residential real estate, including roofs, HVAC, fire protection systems, alarm systems and security systems.

The maximum deduction for 2021 is $ 1.05 million (the maximum deduction is also limited to the amount of income earned from the business activity). The deduction begins to gradually disappear when the qualifying assets put into service this year exceed $ 2.62 million. Again, you don’t need to decide if you want to make the deduction immediately until the time of deposit.

Business meals

Not all tax reduction tactics have to be dry and boring. A temporary tax provision makes you have a little fun.

For 2021 and 2022, businesses can generally deduct 100% (compared to the normal 50%) of qualifying business meals. In addition to meals eaten and provided by restaurants, eligible expenses include those for corporate events, such as holiday season. As many employees and customers return to work for the first time after extended absences linked to the pandemic, a corporate celebration could provide both tax relief and a valuable opportunity to reconnect and re-engage.

Stay tuned

The TCJA was enacted with just over a week remaining in 2017. It’s possible the BBBA in the same way will come down to the wire, so be prepared to take quick action in the dying days of 2021. Address to your ORBA advisor for the latest information.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.