After Tax Day has come and gone, many small business owners are relieved to put it out of their minds and refocus on their day-to-day responsibilities—at least until next year. Accountants are similarly grateful to mark the end of a grueling three months of all-nighters, but the truth is that taxes can’t be pushed aside on April 16. To maximize a company’s savings, tax planning isn’t just one annual session at the end of each year; taxes are a year-round affair. Small business owners should meet with their accountants on at least a quarterly basis to discuss relevant topics and navigate tax proposals with potential to impact their businesses. With 2021 taxes officially out of the way, now is the perfect time to get a jumpstart on 2022 so that any key strategies can be implemented before the year-end rush.
Some hot topics that should be carefully considered for the year ahead include:
General Cash Flow Planning
With COVID-19 came numerous stimulus incentives for small businesses. From the Payroll Protection Program to the employee retention credit, paid sick and family leave credits, and various other grants, small business owners were provided much needed cash to continue operations throughout the pandemic. Some businesses are still holding onto some of that cash and should be planning its use for the upcoming year. For others, planning and budgeting for a year in which the stimulus programs have expired should be a focal point. For those with active COVID-19 EIDL loans, loan increase requests will continue to be evaluated for up to two years after the original loan origination date or until funds are exhausted, whichever comes first. Debt restructuring and cash availability should be carefully considered by the business owner based on these timelines.
Deductibility of Research and Development Expenses
Flying under the radar for 2022 are the changes to the deductibility of research and development expenses. As of January 1, business owners can no longer deduct research and development expenses in the year the expenses are incurred. Instead, these expenses must be amortized over 5 years. This will increase the current year tax burden and reduce cash flow for businesses involved in research and development. While there are proposals to eliminate these changes or delay their implementation, there has been no movement on that decision as of this time. Affected businesses should review the impact of these changes and their eligibility for research and development tax credits with their advisory teams.
The Secure Act 2.0
Passed by the House in late March, the Secure Act 2.0 makes numerous changes to employer retirement plans including:
- Mandatory Automatic Enrollment for new or modified plans
- Allowance for employers to make matching ROTH contributions. Currently, matching contributions made by employers are all designated to pre-tax traditional accounts. The deductibility on ROTH contributions made by the employer is currently unclear.
- Allowance for student loan matching contributions. This allows employers to base their matching contributions off the employee’s student loan payments instead of their retirement plan contributions.
- Expanded employer tax credits including a larger credit for start-up costs and credits for employer contributions up to $1,000 per employee
The bill has now moved onto the Senate for review this month.
New York State Pass-Through Entity Tax
Introduced in 2021, New York State enacted its version of the pass-through entity tax (PTET) as a workaround to the limitations on the deductibility of state and local income taxes imposed by the Tax Cuts and Jobs Act of 2017. By electing into the program, the pass-through entity business owners’ personal New York State income tax is paid by the business, creating a Federal tax deduction as a business expense. The taxes paid are then passed through to the business owner as a refundable tax credit to be utilized on their personal tax returns. While New York State waived the estimated tax payment requirement for 2021, quarterly payments are required for 2022. In the past, these payments would have been the responsibility of the business owner to make personally. Therefore, businesses will need to plan for the amount and timing of these tax payments and their impact on cash available for operations.
Credit Eligibility Review
Business owners should consider conducting a thorough tax credit eligibility review with their advisory teams. There are a plethora of credits available to incentivize small businesses at both the Federal and State levels. Research and development credits, work opportunity tax credits, emerging technology credits, retirement plan credits, investment tax credits and the employee retention tax credit are just a few for which small businesses may be eligible yet they are not taking advantage. Especially where the employee retention credit is concerned, these credits can amount to hundreds of thousands of dollars. It’s worth taking the time to explore what’s available with a tax expert.
Build Back Better Act and Green Book Proposals
Keeping a vigilant eye on Capitol Hill and the various tax proposals will continue to be a focus throughout the remainder of the year. It’s unknown at this time what might get passed, but the Biden Administration continues to fight for an increase to individual and corporate tax rates, an increase to the capital gains tax rate and the closing of several tax loopholes—including back door ROTH conversions, elimination on the step up in basis on assets at death, and tighter restrictions on the deferral of gains utilizing 1031 exchanges. Understanding the current legislation, the likelihood of passage and the timing of tax changes will play a key role in implementing tax strategies that make the most sense for each business owner and their business.
Policies and programs with tax implications are constantly changing, and with everything small business owners have on their plates, it can be impossible to keep up to date on it all. It is critical to lean on tax advisors to ensure nothing is missed. Establishing proper tax planning strategies and practices will help—and the sooner, the better.