November 30, 2021 - Year-end tax preparation is rapidly approaching, and this year there are even more things for businesses to consider, from the R&D tax credit to Minnesota’s new Entity Level Taxation. From a tax perspective, the best strategy for 2021 might be to accelerate revenue in this year. That may sound like unusual advice, but there is a good chance that taxes will rise in 2022, so this may be the better year to have more taxable income.  From a business standpoint, you should work with your tax advisor to decide on a case-by-case basis whether it makes more sense to reduce taxes this year or wait till next year.

Tax Strategies to Consider in 2021

1. Employee Retention Credit

This credit is only available for 2020 and 2021 tax years. We have found that many companies don’t realize they are eligible for this credit. Even if you are not directly impacted, through revenue loss or shut downs, you may still be eligible if COVID issues nominally impacted your business. Also, the indirect impact is often overlooked and although a government mandate didn’t impact you directly, it may have impacted your supplier which ultimately impacted your business. 

2. Equipment acquisition

Thanks to global supply chain delays, equipment has been very hard to acquire. If you were able to acquire new equipment in 2021, go ahead and write it off. You can write off 100% of the cost of qualified equipment and improvements, or you can choose to write it off over time.

3. R&D Tax Credit

Just a reminder that something doesn’t have to be new to the world to qualify for this deduction. It only has to be new to your company. That applies to concepts, products, processes, prototypes, and improvements.

4. Work Opportunity Credit 

The cost of labor is high, so we encourage utilizing all credits you have available. If you hired veterans, summer interns, long-term unemployed, or anyone from eligible targeted groups, you may be eligible for the WOTC. You must have appropriate documentation to get the credit. The best way to ensure this credit isn’t overlooked is make it part of your hiring process. Qualified individuals usually know they are eligible, so make it a point to ask every new hire to complete a WOTC eligibility form. That way, the company will know right from the start and can take advantage of the tax credit.

5. New Minnesota-Entity Level Taxation

Minnesota now offers a nice benefit that allows payment of state income taxes at the entity level. This is new in the last few months, so we are still waiting on additional guidance (expected soon). Under this new rule, companies can pay their MN taxes on behalf of shareholders and take the deduction at the entity level. The company retains greater cash flow, and shareholders benefit because they get a credit for these taxes paid and it is no longer limited by the itemized deductions maximum.

Why? Currently, owners can write off only $10,000 of their taxes. If the entity now pays the tax, individuals will be responsible only for wage withholding and real estate taxes. That means the individual can take deductions without the business-related cap.

6. Bad debts and obsolete inventory 

Nothing has changed about this for 2021. Businesses should still write off uncollectible receivables and also obsolete inventory, or at least write inventory down to fair market value.  This is good business practice and allows you the benefit of a tax deduction at the time this is written off.

7. Maximize Section 199A deductions

Section 199A is a qualified business income deduction (or the QBI deduction). This allows US businesses to deduct 20% of their taxable income. Certain limitations apply but this essentially creates a 29.6% federal tax rate on the business income versus 37% on businesses without 199A deduction. This provision was enacted in 2018 and there is discussion of it being eliminated or capped. This is a substantial benefit for US manufacturers so make sure you take full advantage of this for 2021.

8. Understand labor rates 

Understanding your labor rates, or standards, is very important for reliable financials. If overhead is “over absorbed”, meaning more cost is applied to inventory than incurred, then not only is inventory overstated but so is profitability. This means your profits are inflated and your taxes are increased due to the inflated profits. Reviewing your overhead and labor rates to ensure accurate costs are included in inventory and taking the tax deduction is advised.

2021 or 2022?

These are all great tax savings opportunities. But with proposed income tax rate hikes still uncertain, it is important to consider your cash flow needs, and the best timing of taking some of these tax deductions. Overall, it has to be more than just a tax decision, it has to be a good business decision too.