While the pain of your 2020 tax filing is still fresh in your mind, it’s time to start being proactive for next year’s filing. As you put those 2020 tax docs into storage and make your dreaded tax payments this is the perfect time to set yourself up for a LESS stressful tax prep process. Starting early also helps you think more strategically about how tax returns can turn into business opportunities. Tax planning requires good data and organization.
Here are the questions our clients are asking – and the questions you may be asking yourself about 2021 taxes.[If you’re still waiting on your refund, note that while refunds usually come in two weeks after filing your tax returns, this year it can take up to 21 days. You can check the status of your 2020 refund here. If you weren’t lucky enough to get a refund in 2020, maybe it’s time to change that for next year?]
What information should I save from my 2020 tax return?
If you’re already using a CPA, they should have everything on file. However, if you filed your own return OR you’re considering changing CPAs, you should be sure to locate and save the following in a “2021 Tax Return Essentials” folder:
- A copy of your full return submission
- All carryover schedules (NOLs, passive losses, disallowed tax credits, donations, etc.)
- Any Depreciation Schedules for calculating future depreciation expense
- Any Permanent or Irreplaceable documents like Real Estate Purchase Statements, Business Operating Agreements, etc.
What information should I start tracking immediately for my 2021 return?
- Revenue numbers – If you have economic nexus in multiple states, make sure you are tracking state-by-state revenue so you don’t have to deal with this painstaking task later.
- Payroll documents – You’ll also want to make sure payroll filings (941s, W2s) are available to whoever is filing your 2021 tax returns. Most payroll providers like ADP or Gusto will have a feature where you can add access for your accountant.
- Adjusting Journal Entries – Any edits or corrections to your 2020 financial statements that were made for tax filing purposes should be applied – so that 2021 numbers have the right foundation.
- Retained earnings – Your business tax return will have a retained earnings or partners’ capital account. This number can be found on your company’s balance sheet and should match your prior year tax return Schedule L.
What dates should I put on the calendar for 2021 tax deadlines?
IRS 2021 Tax Return Deadlines:
- March 15, 2022 for Partnership Returns (Form 1065) and S-Corporations (Form 1120-S)
- April 15, 2022 for Individual Returns (Form 1040), Trust and Estate Returns (Form 1041), and C-Corporates (Form 1120)
- May 15, 2022 for Non-Profit Returns (Form 990)
CPA Deadlines – Most firms need to receive your documents between two and five weeks before the actual tax deadline above. We recommend allowing more time if it’s your first time working with your CPA.
Note on Extending Deadlines: If you know you won’t be able to file by the original due date, make sure you calculate and make an accurate extension payment to avoid penalties. Filing for an extension should avoid any failure-to-file penalties, but actually making the extension payment will stop the failure-to-pay penalties.
What tax credits should I be planning for in 2021?
Many of the 2020 tax credits are still available and important for companies to explore with their 2021 filings. Employee Retention Tax Credit, R&D Tax Credit and the Work Opportunity Tax Credit are the ones we’re talking about most often. You can read more about them here.
How can our 2020 tax return guide our 2021 tax planning conversations?
Throughout 2021, businesses can be looking at key metrics like gross profit margin, net profit margin and individual expense categories to identify areas of opportunity. Are there expenses that can be lowered in 2021? Licenses that can be renegotiated? Penny pinching will only get you so far and we encourage a higher level thought process when looking at tax planning. It helps to start with the end in mind by asking your leadership team “If we increase profit in 2021 by X, what can we do with it?” When your CPA knows your vision and goals, they can help you make tax-efficient decisions regarding purchases, structure, timing and compensation methods. The companies we work with that have the clearest annual goals – for example, paying off debt, increasing distributions/dividends, reinvesting in R&D – have the most success in working with us to craft a tax strategy that makes it happen.
What changes in 2021 tax rates should I be aware of?
We’re expecting more tax reform, but we don’t have the specifics nor do we know how it’ll impact 2021 tax preparation. At this point, we’re anticipating major tax reform to take effect for the 2022 tax year. For personal filings, we do know that the standard deduction will increase $150 ($300 if filing jointly) and the child tax credit is going up to $3,000 ($3,600 for children 5 and under). Families will be receiving these credits monthly starting in July. Retirement contribution limits will stay similar to 2020 but income phaseouts will increase. Social security wage base limits will go from $137,700 to $142,800. The lifetime giving exclusion is currently at $11.7M per individual but we’re seeing major discussion around that cap and could see changes. Capital gains rates will stay at 0%, 15% and 20% for the time being but an additional 3.8% net investment income tax may kick in depending on the situation. Capital gains rates are expected to increase in the near future so there will be major planning around that for 2021. We’ll continue to share rate updates as we see them.
I didn’t file with a CPA in 2020 – should I use one in 2021?
Here’s the checklist we use with prospective clients – if any of the following are true, we highly recommend using a CPA. The tax benefits greatly outweigh the cost of services.
- If you are a business taxed as a partnership or corporation
- If you have rental properties
- If you have investments in closely held businesses or investments in publicly traded partnerships
- If you are self-employed
- If you trade bitcoin
I’m a business owner in Austin, anything unique to filing 2021 taxes in Texas that I need to know?
If your business is projected to have income above the $1.18M revenue threshold in 2021 (and cause you to pay Texas Franchise Tax), revisit your Texas Franchise gross margin calculation method. There are four methods for the long form and an EZ method available that might reduce your tax payment. Also note that there is a reduced tax rate, 0.375%, available for retail and wholesale businesses in Texas in 2021. And don’t forget to explore the R&D tax credit variations at the state tax level.
Beyond tax planning, what tax strategies should we consider, especially in 2021?
Low interest rates are leaving the door wide open for expansion for so many companies. We have several clients refinancing long term debt for lower monthly payments and to tap into equity in appreciated real estate investments. In addition, Economic Injury Disaster Loans (EIDL) are still available for small businesses at 3.75%.
Do yourself a favor, start today.
In summary, don’t wait until Q1 of 2022 to start thinking about your 2021 tax return. When you start your tax planning this early, it becomes tax strategy. Most successful businesses build annual tax filings into their overall plans and use these filings to create goals and benchmarks. We’d love to help you and your business turn your tax returns into an opportunity instead of a chore – contact us today.