What do you need to know about filing a 2021 tax return if you own a business

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The rules regarding tax on small businesses have changed markedly in the last two years. This year is no exception, as many of the various deductions and deferrals from the pandemic era are coming to an end.

The good news is that even if these benefits cease, the impact on the overall tax rate for most small business owners will not be significant. Auditors and tax planners say the greater impact would have come from the Build Back Better Infrastructure Act, which includes proposals to increase capital gains tax, limit the 20% deduction for qualified business income under Section 199A and other factors that would increase tax, but they have not come into being. Yet.

“In many ways, the tax bill has been about the dog not barking. They did nothing on capital gains, they did nothing on state taxes. There is a lot of good news about things that did not happen,” said Dean Zerbe, national CEO. at Alliantgroup, a tax consulting firm.

Meanwhile, business owners can still apply retroactively for certain pandemic-related benefits. Here are some of the biggest changes that small business owners need to know about this tax season.

It is not too late to claim employee withholding credit

Created in 2020 as part of the CARES Act under then-President Donald Trump, the employee retention credit ended in September – a quarter earlier than expected. The ERC is a fully refundable payroll tax deduction for employers that can add up to $ 70,000 per year. quarter and was created to encourage companies to keep employees on their payroll.

The program has undergone three major changes in the last two years, which is a major reason why many business owners were unaware of the program or did not apply for it.

The program was initially not open to those who took out a PPP loan. That changed when the second iteration came. Rules were also loosened that limited how much a company could get depending on how much it had been affected by the pandemic.

For small businesses that missed the program, it is not too late to file retroactively. Many business owners are unfamiliar with the program, said Kevin Kuhlman, vice president of federal government relations at the National Federation of Independent Business, but can still apply. Applications with retroactive effect are expected to be a large part of this year’s taxes.

“We’ve seen a lot of frustration from business owners over the changes to that program, especially the shortening of it. They kind of felt – especially if they trusted the tax deduction – that they had been given a little short time,” Kuhlman said.

The tax treatment of operating losses is less generous

How business owners can reverse or carry forward net operating losses has changed a lot in the last few years. Previously, NOLs could be carried back two years and carried forward for 20 years. Then, in 2017, tax breaks and the Jobs Act changed the rules by limiting NOL deductions to 80% of taxable income and not allowing rebates.

When the pandemic hit, the CARES Act waived the TCJA rules and allowed business owners to reverse net operating losses generated after December 31, 2017 and before January 1, 2021 for up to five years. In addition, the ceiling on business interest expenses was raised to 50% of business income, up from 30%. Net operating losses were prominent in 2020 taxes, and business owners also amended previous tax returns with net operating losses, which they reversed.

Now the rules about how business interest expenses and net operating losses can be used have changed back to what they were before the pandemic. Limitations on net operating losses may mean additional income tax payments. For example, if a business owner had a net operating loss in 2018 and then had taxable income in 2019, they could use net operating loss to reduce taxable income in 2019. Under the CARES Act, it could also be carried backwards if they had a taxable income in 2017. It is now coming to an end.

Tax deduction for paid Covid-19 leave has expired

Many people have had to take time off for the last two years due to caring responsibilities – caring for a quarantined family member or children who have to be supervised all day because the school is closed due to Covid-19. The Families First Coronavirus Response Act, passed in March 2020, required certain employers to provide paid sick leave or sick leave for reasons related to the pandemic. While it expired in late 2020, employers who continued to offer such benefits could use payroll tax deductions to cover the cost of benefits. Now the tax deduction for Covid-19-related paid leave expired in September, making it difficult for smaller employers to grant extra paid leave.

Deferred social security payments are due

Under the CARES Act, employers could defer payments of the employer portion of Social Security. Now these payments are due. Half are due by the end of 2021, and the other half are due by the end of this year. As payments have already been deferred, the IRS has warned that there will be fines for all taxpayers who miss the December 31 deadline.

Tax planners say this change is less likely to cause pain to business owners as few took advantage of it. Edward Renn, a partner in the private customer and tax team at Withers, said he does not see too many problems as many customers carefully put the money aside in a bank account so the money is ready when needed.

Given all the changes in tax rules over the last two years, small business owners may need to lean on an accountant or tax planner more than ever. An addition to the stress that tax returns often bring is the lack of responsiveness from an overburdened IRS, which is dealing with a record-breaking backlog of tax returns.

“It just feels like it’s fallen off the rails. There are 6 million feedbacks that still need to be submitted, and maybe one in 10 phone calls will be answered,” said Meredith Tucker, principal at Kaufman Rossin, an accounting firm. and consulting firm. Tax returns from last year are still being processed. Taxpayers who have an overpayment may apply this overpayment for the next period, but previous tax applications have not been processed yet.

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