As architecture and engineering firms move into the final quarter of 2021, it is a good idea to start strategizing and putting together a year-end tax plan to help minimize 2021 income taxes. It is also a good time to consider tax implications that may be unique for the 2021 tax year, such as Paycheck Protection Program (PPP) loan forgiveness and the Employer Retention Credit.
This article will cover tax planning strategies and tax issues that should be taken into consideration for the 2021 tax year.
Depreciation ”“ 179 and Bonus
Under a 179 election, a firm may elect to expense the cost of certain property and deduct it in the year the property is placed in service. The maximum 179 deduction for 2021 is $1.05 million, with a phase-out threshold of $2.62 million. That is, each dollar of qualified property placed in service during the tax year that exceeds the threshold limit reduces the current year deduction. There are some notes regarding 179: most state and local taxing jurisdictions limit the aamount of qualified expenses, and any qualified expense can not create or increase a current year loss (any disallowed amount is carried forward).
100% bonus depreciation is allowed for qualified property placed in service before January 1, 2027. Qualified property is generally property whose tax life is 15 years or less and now includes qualified leasehold improvement property. Unlike 179 expense allowance, there is no dollar, investment, or taxable income limit on the total amount of bonus depreciation that may be claimed. Also, bonus depreciation can create a net operating loss deduction. Similar to 179 expense allowance, most state and Local taxing jurisdictions limit the amount of bonus depreciation that can be claimed in the initial year property is placed in service with the disallowed amount becoming a deduction in subsequent years.
Prepayment of Expenses (Cash Basis Taxpayers) – Including Repayment of Deferred FICA Taxes
If the firm files its return on a cash basis, consideration should be given to prepaying expenses (to the extent allowable) to reduce taxable income. Generally, to be able to deduct the full amount of a prepaid expense, the following criteria must be present for the expenditure: 1) this is an actual payment, not a refundable deposit, 2) this is a substantial business purpose and not merely for tax avoidance, 3) this does not result in a material distortion of income. In short, if the payment creates an asset with a useful life extending substantially beyond the end of the tax year in which the payment is made, the expenditure may not be deductible, or may be deductible only in part, in that year. Prepaying a January rent or health insurance invoice likely does not qualify as extending substantially beyond the end of the tax year, but prepaying six months of each invoice could create an issue. If, under the CARES Act, a firm chose to defer its share of FICA payroll taxes through the end of 2020, the deferred amounts are due 50% in 2021 and 50% in 2022. If enough cash exists, a firm may consider paying both amounts prior to the end of the year.
Elect Into and Make a State Pass-Thru
Entity Tax Payment
Certain state jurisdictions (Connecticut, New York, and California, to name a few) provide a mechanism whereby a pass-thru entity can take a federal entity-level deduction for state income taxes, effectively circumventing the individual state and local tax (“SALT”) limitation of $10,000. This reduces the amount of net income flowing through to individual partners, members, and shareholders, giving them the benefit of an above-the-line deduction of state and local taxes that is not limited by the SALT cap. Each jurisdiction”™s rules are different, so an entity must understand the rules and weigh the pros and cons of making the election prior to proceeding.
Consider the Effect on Individual Taxes
if the Firm is a Pass-Thru Entity
Individual projections can be done in conjunction with projections at the entity level to determine cash flow needs for end of year related to owners and staff bonuses as well as beginning the new year.
Consideration should be given to taxes at the individual level for determination of estimated or withholding taxes due in order to avoid potential underpayment penalties as well as providing expectations come April 15. This can also be an opportunity to identify ways to maximize tax savings when looking at the whole picture.
Paycheck Protection Loan Forgiveness ”“
Potential State and Local Tax Implications
Although federally the loan expenses and forgiveness have been deemed deductible and tax-free respectively, firms should ensure the jurisdiction they file or will file in will allow for the same treatments. The determination can be different depending on entity type (pass-through entities versus C Corporations).
Consideration should be given to apply for forgiveness before year-end if there are at-risk or basis issues for deducting losses. Forgiveness of the PPP loan creates non-taxable income, which increases basis.
Employer Retention Credit (“ERC”)
Unlike PPP loans where expenses are deductible and forgiveness is not taxable (for federal and most states), ERC is taxable to a firm by not providing for an expense deduction for the amount of the credit. This is true even if an ERC refund check is not received until the following year.
Eligible firms can amend their Form 941, Employer”™s Quarterly Federal Tax Return, for prior quarters up to and including the third quarter of 2021. A credit for 70% of the first $10,000 of qualified wages per employee per quarter for 2021 is worth pursuing.
If you have any questions or if you would like to discuss planning opportunities, please reach out to your Citrin Cooperman advisor.
Jeff Stuart has over 16 years of accounting experience. He is a director and leader for Citrin Cooperman”™s Architecture & Engineering Practice. Jeff”™s industry expertise includes construction, real estate, manufacturing, and architectural and engineering firms as well as employee benefit plans.
Sally Maybruch is a manager in Citrin Cooperman”™s White Plains office, provides a mix of accounting and tax compliance services to closely held businesses and high net worth individuals. Sally has over 30 years of accounting experience, working in a variety of industries, but has concentrations in architectural services and other professional service industries.
Citrin Cooperman is one of the nation”™s largest professional services firms. Citrin Cooperman & Company, LLP, a licensed independent CPA firm that provides attest services and Citrin Cooperman Advisors LLC, which provides business advisory and non-attest services, operate as an alternative practice structure in accordance with the AICPA”™s Code of Professional Conduct and applicable law, regulations and professional standards. Clients are in all business sectors and leverage a complete menu of service offerings. The entities include more than 200 partners and over 1500 employees across the U.S. For more information, please visit citrincooperman.com, and be sure to follow us on LinkedIn, Twitter, Facebook, Instagram, and YouTube.
