Ongoing economic uncertainty, new regulations and the prospect of higher taxes in the future are making tax planning for U.S. companies particularly challenging this year. Business leaders need to be aware of potential gotchas as they prepare for the 2021 tax season.
Expiring Tax Deductions & Credits
The CARES Act and Consolidated Appropriations Act, both passed in 2020, provided fast, direct assistance to US businesses by, among other things, temporarily repealing limits on certain deductions and offering incentives for keeping employees on payroll during the pandemic. Fast forward a year later and many of these provisions are set to expire. Three of the most significant changes are a return to pre-COVID limits on deductions related to interest expense, deduction of net operating losses and elimination of the Employee Retention Credit (ERC):
- Business Interest Expense Deduction. The CARES Act set the business interest expense deduction limit at the sum of a company’s total interest income, plus 50% of adjusted taxable income (ATI), plus floorplan interest financing expense. For 2021, the limit returns to 30% of ATI.
- Net Operating Loss Deduction. The Tax Cuts & Jobs Act of 2017 changed how net operating losses (NOLs) are treated, removing the ability to carryback NOLs to prior years and limiting the deduction to no more than 80% of taxable income if carried forward. The CARES Act changed this, providing a carryback option up to five years for net operating losses recorded in 2018, 2019 or 2020, and allowing 100% offset of taxable income for these years.
- Employee Retention Credits. The recently signed Infrastructure Investment and Jobs Act (IIJA) eliminates employee retention credits (ERC) for wages paid after September 30, 2021. ERCs were part of the CARES Act and gave employers a 50% payroll tax credit on qualified wages of up to $10,000 per employee in 2020 and 70% credit on qualified wages of up to $10,000 per employee per quarter in 2021. Eliminating ERC during the last three months of the year reduces the maximum available payroll credit by up to $6,000 per employee.
Tax Planning Isn’t a Once and Done Process
Taxes are a significant expense for most businesses. Taking steps to minimize this expense while also complying with ever evolving tax laws requires careful planning. Unfortunately, tax planning is often treated as a once-a-year project, with companies scrambling to find deductions, credits, allowances and/or exemptions that will reduce their tax liability. And because companies frequently wind up reclassifying some transactions and accelerating or deferring others, it increases the risk of accounting errors. These simple mistakes can add up to thousands or even tens of thousands of dollars in fines and penalties.
The better option is to approach tax planning as an ongoing process. Begin by conducting a thorough review of current accounting practices to identify potential savings opportunities. It’s essential to have someone with a thorough understanding of state and federal tax regulations as you do, so always consult with a certified tax professional before making any decisions.
Once you've assessed your options and developed an overall tax management strategy, document company policies and procedures, and make sure your accounting team understands and follows them. Transactions can often be recorded in multiple ways, and inconsistencies are a red flag to auditors. Having clearly-defined policies and making sure they are followed helps minimize errors.
Simplify Tax Management with NetSuite
Effective tax management requires accurate, data. NetSuite improves accuracy by simplifying entry of financial transactions, automating depreciation and other accounting processes, and providing effective controls to help maintain compliance with tax and accounting regulations. NetSuite’s planning capabilities and multi-book feature enable companies to evaluate the impact of different tax strategies, eliminating the need for complex spreadsheets. And a cloud-base platform gives business leaders and their tax advisors convenient access to the information they need, improving collaboration and accelerating the tax planning process.
