Tax Planning in an Uncertain Time
A major takeaway from the last twenty months of living in a pandemic is the importance of planning and adaptability. As 2021 comes to an end, there is still so much unknown of what 2022 will bring. Will we ever get back to “normal”? What new legislation will affect the way I do business? This is what we as CPAs hear from the business community as they continue to try to navigate all the changes that keep coming their way.
We do know this: Tax planning now can help businesses make more informed decisions, which leads to more success, profits, and adaptability. Tax planning is a big piece of the planning pie. As much as we accountants love to crunch numbers, it can be difficult to plan for future taxes without a crystal ball next to our giant calculator on our desk. Federally, several proposed tax legislations are floating out there, and at the time of writing this, it is unsure what realistically will pass and when. For the state of Minnesota, we have what is called static conformity; federal tax law changes will not automatically translate to Minnesota tax law changes. If Minnesota does not timely adopt federal changes through the legislature, there could be differences in the treatment of taxes items between the two systems.
Let’s examine some hot topics, talking points, and tax planning ideas for decision-makers to consider and discuss with their tax and financial advisors.
- An omnibus tax bill was passed on July 1, 2021 that retroactively conformed to recent federal tax provisions. Major provisions include
- Exclusion from income of Paycheck Protection Program (PPP) loan forgiveness
- Exclusion from income of Economic Injury Disaster Loans (EIDL) loan forgiveness and SBA subsidy payments- 2020 only
- Section 179 conformity to federal- can expense up to $1.05M of eligible fixed assets such as equipment. Special rules apply to building improvements and vehicles
- If you have EIDL, SBA subsidies, Restaurant Revitalization, or Shuttered Venue operator grant forgiveness, be prepared to pay Minnesota tax for the tax year 2021 unless future conformity is passed.
- If you had PPP loan forgiveness in 2021- you no longer need budget MN taxes on it
- Evaluate an opportunity for tax planning – Section 179 vs. Bonus depreciation. Bonus depreciation taken federally must be spread over five years for Minnesota but can create a tax loss. Section 179 expensing cannot create a loss but will not have add-back for MN purposes. Accelerated depreciation is a great way to manage your taxes, as there are various methods to accomplish your tax planning goals. Planning might be needed now to purchase and place new equipment in service before December 31, 2021.
Suppose you had already filed your 2020 Minnesota return before the conformity bill. In that case, the Minnesota Department of Revenue is working through adjusting the returns and hopes to issue refunds without taxpayers needing to amend. Watch for a letter from the DOR if you were affected by late conformity.
New Minnesota Pass-Through Entity Election “PTE”
In 2018, the Tax Cuts and Jobs Act limited the State and Local Tax (SALT) deduction to $10,000 and increased the standard deduction. In a high tax state like Minnesota, individual taxpayers can easily surpass $10,000 of real estate and income taxes. Due to this, many individuals no longer itemize their deductions and instead take the standard deduction, effectively losing the federal tax benefit of paying state taxes. If the SALT cap still exists for the tax year 2021 and beyond (it is a hot topic in discussion with federal lawmakers), Minnesota will allow a workaround. The pass-through entities (PTE) election is an option for eligible PTEs that file as a partnership or an S-corporation to pay the Minnesota tax on the business income at the entity level. This allows the business to deduct the Minnesota taxes, as they have no cap on state tax as individuals do. The IRS has blessed these SALT workarounds, and almost half of the states have or will be enacting similar PTE options.
Takeaway: Talk to your tax advisor to determine if your pass-through is eligible or possibly can become eligible to take advantage of this opportunity to save federal tax. This could change how or if you pay a fourth-quarter tax estimate, and action may need to be taken before December 31, 2021.
Federal tax planning considerations
- For entities operating as C Corporations- there could be a possible tax rate increase coming in 2022. Tax planning should be considered to accelerate income into 2021, or delay expenses to 2022 to take advantage of the current 21% flat rate.
- For entities operating as sole proprietors, S-corporations, or partnerships, the 20% Qualified Business Income (QBI) deduction continues to be key in tax planning. The calculation is complex, and full-picture tax planning is needed to maximize it. It is possible that a year-end bonus or accelerated deduction into 2021 could help provide a more significant QBI deduction.
- The estate and gift tax landscape could totally change. For those thinking of selling or gifting their business, you should be talking to your accountant and lawyer and ready to adapt in the event of a new tax bill quickly.
- Business entity election- should you consider changing your entity selection to maximize tax savings?
There are many other proposed changes that could increase your tax bill for 2021 and future tax years. While it may not be avoidable, it could be helpful to plan for additional taxes when making financial decisions for budgeting purposes. Having trusted advisors in your corner is key to taking swift action when needed to adapt to the ever-changing world we are living in.