This post was written by Christian Martinez, CERTIFIED FINANCIAL PLANNER™, Advisor Associate of Sandhill Investment Management
With coronavirus throwing our lives into a frenzy and with a new administration in the White House, there have been some questions around updated taxation for businesses.
Most businesses in the U.S. (S-Corporations and LLC’s) are considered “pass-through entities” for tax purposes, meaning that the income and expenses pass through to the owner’s individual tax return and taxes are paid at individual tax rates. Given this, the below changes apply to these more common entities.
Pass-Through Deduction
For many businesses organized as S-Corporations, LLCs, Partnerships, or Sole Proprietorships, the most important feature in the tax code is the special deduction for pass-through businesses. In 2017, former-President Trump pushed this 20% deduction. It was designed to give these businesses an effective tax rate similar to the one that corporations receive. In 2020, individuals with taxable income up to $163,300 and married couples with income up to $326,600, can usually take advantage of the full pass-through deduction. Those numbers increase by $1,600 and $3,200, respectively for 2021. If income is above those thresholds or if the business is a specified service business – like medical practices or accounting firms – then one starts losing the deduction according to a graduated formula.
Note: Congress made some tax law adjustments in 2020 to help businesses hit hard by the Coronavirus Pandemic.
Net Operating Losses
Under the 2017 tax overhaul, businesses were no longer permitted to deduct current-year losses against past profits. Congress changed this provision in 2020 to help companies obtain much needed cash now, as opposed to waiting to receive it as earned profits in the future. For tax years 2018, 2019, and 2020, business owners can carry losses back for up to five years to offset past profits. They can file amended tax returns to claim refunds. This could mean a substantial refund if you had a loss in 2020
and profits in prior years. In addition, Congress temporarily lifted a statute that did not allow the offsetting of nonbusiness income against business losses. This change could be hugely beneficial to people who have large investment gains but losses in the companies that they own.
Paycheck Protection Program & Employee Tax Credit
This program created a maelstrom of controversy during 2020, but it was mostly resolved over time. There was a lot of back-and-forth between Congress and the Treasury Department as to how these forgivable, low-interest loans would be taxed. At the eleventh-hour in December 2020, Congress decided that businesses would be able to deduct their payroll costs just like they would in a normal tax year even if they used funds from the PPP.
Congress also created an Employee Tax Credit for businesses that retain their employees, but it cannot be used for the same expenses as the PPP loan if they took it. The Employee Tax Credit effectively works like a wage subsidy. From March 13 through
December 31, 2020 it covers 50% of wages and it covers 70% of wages paid in 2021 through June. For 2021, if business revenue declines 20% or more compared with 2019, employers are eligible for this credit. This rule was designed in a way that many
businesses will be eligible to receive the credit.
Although our government has passed sweeping changes to tax law to aid companies throughout the pandemic, we have seen many local businesses permanently close their doors. Thankfully we can now see the light at the end of the tunnel with restrictions on
our businesses starting to be lifted. Hopefully everyone will have a healthy and successful remainder of 2021.
All of the above matters should be discussed with a business tax-advisor who should be well-versed in all tax changes. If you need a recommendation, have any questions, or would like to learn more, please schedule a time to speak with Christian Martinez of Sandhill Investment Management using the link here.
This material has been prepared for general informational purposes only and is not intended to provide — and should not be relied on for — tax, legal or accounting advice for the reader. You should consult your own tax, legal and accounting advisors before engaging in any transaction. The information that has been discussed has been obtained from sources believed to be accurate; however, Sandhill Investment Management makes no guarantee as to the accuracy or completeness of the information.
This post was written by Christian Martinez, CERTIFIED FINANCIAL PLANNER™, Advisor Associate of Sandhill Investment Management, a Buffalo-based investment management firm. Since Sandhill’s inception in 2004, our passion for research has been our defining strength. By taking a thoughtful, thematic approach to the investment process, we are able to identify opportunities that offer the greatest combination of value and quality. Our deep commitment to our clients is at the forefront of everything we do. We understand that everyone’s situation is unique, and our range of investment products is carefully designed to ensure we are able to align expectations with execution.
Christian is a CERTIFIED FINANCIAL PLANNER™ and has been with Sandhill for over two years. He is passionate about creating a one-of-a-kind experience for his clients. Christian serves as a member of the Convergence Council at the Albright-Knox Art Gallery and sits on the Alumni Board of Governors at Canisius High School. He lives in the Elmwood Village with his wife, Leigh.
