As the 2021 filing deadline approaches for calendar-year corporate taxpayers, there are several tax changes that have taken in place in 2021 or prior that would have a direct impact on the 2021 tax filings as well as 2022 tax estimates.
Here is a highlight summary of those tax changes and key amounts.
TEMPORARY 100-PERCENT DEDUCTION FOR RESTAURANT MEALS
The IRS issued Notice 2021-25
adding a temporary exception to the 50-percent limitation on deductions for business meals.
- The temporary exception allows a 100-percent deduction for food or beverages from restaurants, as long as the expense is paid or incurred in 2021 or 2022.
- Restaurant is defined as a business that sells food or beverage to retail customers for immediate consumption regardless of whether the food or beverages are consumed on the business’ premises.
- Business meals purchased at any other venue are still subject to the 50-percent limitation.
NET OPERATING LOSS (NOL)
The CARES Act of 2020 allows NOLs arising in 2018, 2019 and 2020 tax years to be carried back for five years and carried forward indefinitely. NOLs carried back can also offset 100 percent of taxable income. However, those changes do not have an impact on 2021 tax year. The rules governing the use of NOLs in 2021 remain the same under the permanent law.
- For pre-2018 NOLs carried forward into 2021, there is no taxable income limitation to the usage. Remaining pre-2018 NOLs will be carried forward 20 years from the year that the NOLs were originally generated.
- For 2018, 2019 and 2020 NOLs carried forward into 2021, the allowable deduction is the lesser of available NOL or 80 percent of taxable income before the NOL deduction.
- For new NOLs generated in 2021 and onward, they must be carried forward only (indefinitely) and subject to an 80-percent taxable income limitation.
For California, AB 85 suspended the usage of NOLs for 2020, 2021 and 2022 tax years for taxpayers with California taxable income over $1 million. SB 113 removes the limitation for tax years beginning on or after Jan. 1, 2022. However, the limitation still applies to 2020 and 2021 tax years.
BUSINESS INTEREST EXPENSE LIMITATION
The CARES Act offered businesses to temporarily claim a business interest expense deduction up to 50 percent of its adjusted taxable income (ATI) for the 2019 and 2020 tax years. For the 2021 tax year, the previous limitation is reinstated in which the business is only allowed to deduct up to 30 percent of ATI.
TEMPORARY INCREASE OF CHARITABLE CONTRIBUTION LIMITS
For the 2021 tax year, corporate taxpayers can deduct qualified cash contribution up to 25 percent of taxable income, which increased from the previous 10-percent limitation.
For contributions of food inventory for the care of the “ill, needy or infants,” the limitation is increased from 15 percent of taxable income to 25 percent for the 2021 tax year.
For qualified disaster relief contributions made between Jan. 1, 2020 and Feb. 25, 2021, the taxable income limitation is increased to 100 percent.
EMPLOYEE RETENTION CREDIT (ERC)
The Infrastructure Investment and Jobs Act eliminates ERC eligibility for wages paid after Sept. 20, 2021; however, 2021 Q1, Q2 and the majority of Q3 continue to qualify for such credit.
Businesses need to add back the refundable portion of the ERC into income for tax purposes; however, the employer portion of social security taxes is still deductible. Learn more about this in a previous blog: “Income Tax Reporting for the Employee Retention Credit.”
BONUS DEPRECIATION PHASE-OUT
Under the current law, the temporary 100-percent bonus depreciation for certain business assets will start to phase out in steps for qualified properties placed in service after Dec. 31, 2022.
This drops to 80 percent for qualified properties placed in service between Jan. 1, 2023 and Dec. 31, 2023. The percentage will continue to drop in later years until it is completely phased out in 2027.
Taxpayers can plan ahead for material capital expenditures in 2022 and 2023 in order to maximize tax benefits for bonus depreciation.
DEFERRED 2020 EMPLOYER SOCIAL SECURITY TAXES
For employers who elected a full deferral under the CARES Act, 50 percent of the 2020 social security taxes were due Jan. 3, 2022, and the remaining 50 percent will be due Dec. 31, 2022.
The related tax deduction for employer social security taxes is generally based upon the payment date, but it is important to consult with tax advisors to analyze and review the interactions with other tax provisions and changes for the year.
These tax changes and related tax compliance is complex and nuanced. To learn more, please contact GHJ’s tax advisors.