The document discusses strategies for adjusting year-end tax planning amid uncertainty regarding potential tax increases proposed by Congress. It highlights the differences between the current administration's tax approach and the previous one, emphasizing the importance of timing income and deductions for high-income earners in 2021. Key tax considerations include net operating losses, business interest expense limitations, and state and local tax deduction challenges.

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Article reprinted from Fall 2021
Tax Strategies
How to Adjust Year-End Tax Strategies in an Uncertain Tax Environment
BY NATE SMITH, CPA
“W
ill they or won’t they?” makes for good television,
but when this tension involves your tax rates
and obligations, it’s much less enjoyable.
Congress has the framework for a budget proposal that would
increase taxes. Whether lawmakers will pass that framework
is unclear. This uncertainty leaves business owners in a
tricky spot for 2021 tax planning. There’s time to implement
strategies, but as of the date of this publication it’s hard to
know whether or when Congress will answer these questions.
The following analysis describes what can be done, with
reasonable certainty, in this tenuous environment.
Where We Are Today
We know that the Biden administration’s tax plan differs
from the previous administration’s and that certain provisions
of the 2017 tax law would be flagged for repeal. What
changes the Biden administration and the slim Democratic
majority in Congress would make to the tax environment
has been one of the largest questions running behind the
scenes of the pandemic response, and it came to a head
with the recent infrastructure bill conversations. If the party
aligns, a separate tax bill could be passed through budget
reconciliation that would make changes to long-term capital
gains taxes, individual income taxes and other items, likely
toward the end of the year.
Timing of Income & Deductions
Business owners often have control over the timing of
types of income, such as bonuses, billings for consulting
income that are accounted for on a cash basis, retirement
plan distributions that are not required distributions, gain
on real estate sales and gain on investment sales. Tax
rates may be going up in 2022 for high-income taxpayers,
particularly for gains, which would favor strategies that
accelerate income to 2021.
Tax Deductions Not Affected by the Current Legislation
To offset income in 2021, consider how you are taking
advantage of the following deductions that have not been
targeted for updates:
■
Net Operating Losses (NOLs) — NOLs generated
in tax years beginning after Dec. 31, 2020 are only
carried forward and can be deducted up to 80% of
taxable income in a given year. NOLs generated in
earlier tax years are not subject to the 80% limitation.
If you have the appropriate income in 2021, the NOL
carryforward should be properly categorized to support
the maximum deduction.
■
Business Interest Expense Limitation — In 2021,
the Section 163(j) limitation on business interest
expense deductions is essentially 30% of tax-basis
EBITDA. Starting in 2022, the calculations for business
interest limitations change, where depreciation and
amortization are no longer part of the equation (it
essentially becomes EBIT), which is expected to further
restrict business interest deductions.
■
State Local Tax Deduction Limitations — The limit
on state and local tax (SALT) deductions may be here
to stay, and more states are creating workarounds
to the so-called SALT cap. If you haven’t considered
the possibility of entity-level taxes in the states in
which you operate, you may want to evaluate this
workaround option.
Keep in mind that individuals generally
use the cash method of accounting, so
expenditures are deducted in the year
paid. You can choose to accelerate
the timing of the payment of a
deductible expense, such as those for
medical costs (e.g., health insurance
premiums, non-urgent medical and
dental services, non-urgent prescription
drugs, non-urgent mileage).
Working with your tax advisor can help you
adjust your tax strategy as more insights come to light.
NATE SMITH,CPA
CBIZ National Tax Office
Nate.Smith@cbiz.com | 727.572.1400, x348