The Taxes, They Are A-Changing

Do You Know What to Expect for the 2021 Tax Season?

2021 Tax Changes on keyboard

Even as you wrap up your business’ 2020 taxes, it’s certainly not too early to educate yourself on changes to expect for 2021. While you should never count on your own tax knowledge to make decisions that might help you reduce some of the effects on next year’s tax filing, the following information can help you identify some important issues to discuss with your tax advisor.

Please understand that the purpose of this article is to help make you aware of potential tax issues to watch for in 2021. It is not intended to provide the advice that only your accountant or tax advisor can offer based on your company’s specific circumstances.

Many State Taxes Have Changed as of January 1st.

Granted, word is out that a Federal tax increase may be in our future, but not all changes are bad news. Regardless of whether your business is an LLC or some type of corporation — or even if you file business income on a personal return — you need to be cognizant of changes as they apply to you. This knowledge can affect the business decisions that you make throughout the year.

You still have to stay current on all tax rules based either on your physical location or your state of incorporation because some changes are significant. According to the Tax Foundation, touted as the nation’s leading independent tax policy nonprofit, 2021 will have many state tax changes, such as the following:

  • Two states increased their marginal tax rate by adding a tax bracket to the top, while another did just the opposite by eliminating the top bracket.
  • One state joined seven other states by eliminating individual income taxes, which might help solopreneurs who file taxes for their business on personal returns.
  • Three states imposed retroactive tax changes.

To further complicate issues, tax changes that were implemented within a fiscal year actually apply on January 1, 2021. Additionally, COVID-19-drew down state Unemployment Compensation funds, which may be adding to the related taxes that you could pay in the near future.

Federal Taxes May be Subject to Changes, As Well

As of this writing, the new administration in Washington has expressed an interest in raising income taxes for high-earners and elevating the standard corporate rate to 28 percent. They are also considering finding ways to increase or decrease individual and business tax burdens. 

Regardless of whether you are an individual who files business taxes on your personal income tax return, or if you run another type of business entity, knowledge about coming federal tax changes is essential. You cannot make effective short- or long-term business plans without knowing how many after-tax funds you will have available for funding.

Federal Shut-Down Money Could Complicate 2021 Taxes

If your business obtained loans through last year’s CARES Act, then you already know the sometimes-confusing list of requirements, including the potential for some degree of loan forgiveness. Considering that individuals had to report their 2020 personal stimulus payments, which were not taxable, you need to be aware that your business will likely have to list even non-taxable 2021 benefits in next year’s tax filings.

You have to know the rules to identify fully- or partially-taxable benefits. For example, the way that you spend PPP loans generally drives the tax consequences of those loans. If you want to learn more, the U.S. Chamber of Commerce offers some information on how it all works, but the details can get complicated very quickly.

Discuss these issues with your tax accountant now, long before you begin work on your 2021 taxes. Especially during a year when you’re working hard to get your business back on track, you want to avoid any unexpected cash flow surprises down the road.

For Now, a Conservative Approach to Spending Makes Sense

It doesn’t take a pandemic to illustrate the importance of keeping current on new and proposed tax changes. While we seem to be seeing a light at the end of the tunnel right now, the shut-down continues to unpredictably affect small businesses. We all were surprised by the last-minute extension of the tax filing deadline, but the federal government might make other unexpected changes to help ease the burden.

The best thing that you can do for your business right now might be to take a conservative approach to business decisions. Try to rebuild your emergency fund by erring on the side of saving, rather than spending. Find new ways to sell your existing products or services before introducing new ones. Recognize all hiring options before searching for new full-time employees. Once the feds nail down their taxing decisions, you can proceed more normally, moving forward.

Updated Knowledge of Tax Changes is Vital to Financial Health

Most decisions that you make revolve around money. Is it time to hire more full-time employees, or retain temporary help as needed? Should you buy an expensive new machine, or look for a newer used model? As a solopreneur, should you take a tropical vacation with your family, or just take them along on your next partially-deductible business trip?

Like me, you are probably not a tax professional. When you run any business, however, you absolutely need to reduce the financial bombshells that tax changes can impose on your company’s cash flow over the next year. Successful small business owners do best when they are creative thinkers. But, that thinking needs to be tempered by accurate predictions of how much money they can spend.

By all means, enlist the knowledge of your tax professional to stay on top of how taxes will affect future spending. But, do your own research regularly, as well. Subscribe to a reputable financial journal. Listen to the business news hours offered on talk radio. Tune in to one of the popular cable TV business stations. These habits can help you to plan for the effects of taxes — and they will provide a surprising number of great ideas that you can implement now and in the future.

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