2021 is finally here. With a new year upon us and a new administration in the White House, there is no better time for individuals, especially small business owners, to engage with their advisors. Accountants have been particularly busy throughout the last 12 months holding their clients’ hands while helping them navigate the fallout from the pandemic. Today, many of them are prepared to continue doing as much while also shedding light on some of the potential tax law changes we might see within the next 12-24 months. I recently spoke with Richard T. Flynn, CPA, President and CEO of Flynn & Company Inc., a full-service accounting and management consulting firm in Cincinnati. Rick shared with us some of the matters he and his associates are addressing with their clients. Excerpts from our dialogue are below:
Chris: Is there anything in particular you are telling your clients they should be doing in 2021?
Rick: Flynn & Company serves a variety of clients and we see many unique scenarios which benefit significantly from strategic tax planning. There is not a “one size fits all” when it comes to advising clients for the 2021 year.
Given that there is a new administration in office, high-net-worth individuals and corporations should consider the possibility of future tax increases. With that in mind, taxpayers who are concerned about potential tax increases may want to consider accelerating income into 2021 and postponing deductions until a later year for both individuals and corporations. Some strategies could include realizing capital gains in 2021, considering a Roth conversion in 2021, and perhaps making gifts while the gift tax lifetime exclusion is still over $11 million.
Some taxpayers may still be able to make contributions to IRAs in 2021 that will count as contributions for 2020 if made by the due date (including extensions) of their returns. Also, in 2021, all individual taxpayers, even those taking the standard deduction, will be able to deduct up to $300 ($600 if married) of cash contributions, to qualified organizations, on their personal tax return. This is an increase over 2020 which was limited to $300 for married taxpayers. We cannot stress enough the importance of planning ahead. The best way to prepare is to meet with your CPA to come up with a strategy that fits your needs and one that you feel most comfortable with.
Chris: What advice are you giving to Paycheck Protection Program (PPP) loan recipients?
Rick: We have been able to help many clients through the application process as well as the forgiveness portion. The PPP loans our clients have been able to receive have helped them stay afloat even through these uncertain times.
Organization is key when applying for the PPP loans. One missed document may halt the process longer than you may expect. Understanding the stipulations of the loan and how to take full advantage of the funds available to you is also a large part of the process.
Anyone who received the first round of PPP needs to be aware of when they should file for forgiveness. Per the Small Business Administration (SBA), borrowers must apply within 10 months as of the last day of your covered period. If this timeframe has passed, they will need to start making payments on the loan as they will no longer be deferred. If they are anxious to get a head start on the forgiveness application, they can apply once all loan proceeds have been used.
We are also advising these clients to consider whether they are eligible for round two. A large prerequisite for the second round is a required 25% decrease in revenue for any selected calendar quarter in 2020 compared to 2019.
With the guidance published by the IRS at the end of 2020, we now know that the forgiveness of the PPP loans is not considered taxable income. This does not, however, mean that there are no tax implications tied to these loans. For those who file their taxes under a flow-through entity, the forgiven portion of the loan is added to their basis in the company.
Chris: What obstacles have your small business owner clients encountered with their PPP loans?
Rick: The PPP loans have been extremely helpful to many of our clients. With the speed at which this type of relief has been rolled out it is not surprising that there have been some challenges along the way for clients and banks. The application process in general can be extremely confusing as each bank has decided to adopt their own procedures.
We have seen a large variety in how the applications have been handled. The largest difference we have seen so far is with the documents required. The SBA has their list of required documents, but each bank also has their own checklist of items. Of the additional documentation banks have required from our clients, there have been many requests for additional payroll reports to prove payroll costs, as well as additional financial statements. For the small business owners who do not have bookkeeping systems such as QuickBooks, Sage, Quicken, etc., it has been difficult for them to present information in a form which the banks will accept. With these inconsistencies, it has been somewhat of a challenge for our clients to understand the differences each bank establishes, and which one they should choose. The calculation for the loan amount itself can be complicated depending on the activity within the company. There have been many PPP calculators offered through various payroll and other software providers, but we have found that they do not always capture all of the information needed for the actual calculation. If a client has chosen to rely on one these assistance tools, they may have been led astray of the accurate amount they were able to apply for.
Chris: Are you suggesting your clients take any particular actions in light of the new administration’s tax law proposals? Or are you taking more of a wait-and-see approach?
Rick: The Biden administration’s tax plan includes a number of proposals to increase taxes for businesses and high-income individuals. With Democrats controlling the White House and Congress, changes are likely to happen sooner rather than later. That could be as soon as 2021, but the general consensus is that 2022 is the most probable year for a tax law change. With that in mind, if taxpayers are in a stable cash position and have the flexibility to accelerate their income, 2021 may be as good of a year as any to pay more tax.
For C-corporations, Biden has proposed increasing the tax rate from 21% to 28%. For pass-through entities, he has proposed phasing out the popular Qualified Business Income (QBI) deduction on income above $400K. For deductions that offer timing flexibility, such as depreciation, business owners should consider taking fewer benefits in 2021 and saving more for future years, when the tax rates may be higher.
For high-income individuals, Biden has proposed several changes that could heavily affect their tax liability, such as taxing capital gains at ordinary rates, increasing the top marginal tax rate to the pre- Tax Cuts and Jobs Act level of 39.6%, and establishing a new Social Security tax on wages over $400K. The change to the capital gains rate stands to see the most dramatic increase, so high-income individuals should consider recognizing gains in 2021. Roth conversions should also be given consideration as a means to accelerate current income and avoid potentially higher future taxes.
For individuals with lower income, the outlook is more positive. Marginal tax rates are expected to stay the same for individuals earning less than $400K. Biden has proposed a $15K credit for first- time homebuyers that could be paid out up front or refundable the following year when you file your tax return. So, if you’re considering purchasing your first home in 2021, it may be worthwhile to hold out for this potential change. There are also credits proposed for retirement contributions, increased child tax credits, and other tax benefits, but a wait-and-see approach is best for these proposals.
Hopefully, this dialogue has been helpful. We encourage most people, especially small business owners, to reach out to their trusted professionals this time of year. Circumstances certainly change over time, and an individual’s financial advisor, accountant and/or attorney are in a unique position to help them as time goes by. A collaborative and proactive approach with their advisors should benefit all individuals in 2021 and beyond.
Richard T. Flynn, CPA, with Flynn & Company Inc., can be reached at 513.530.9200 or by email at email@example.com.
Chris Brennan, CFP®, with MAI Capital Management LLC, can be reached at 513.579.9400 or by email at firstname.lastname@example.org.
This interview has been prepared for informational purposes only. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.
MAI Capital Management, LLC (MAI) is a privately held independent investment advisor registered with the Securities and Exchange Commission and headquartered in Cleveland, Ohio, with regional offices in Columbus and Cincinnati, Ohio, as well as offices in Arkansas, California, Florida, Missouri, New Hampshire, New York and Virginia. MAI’s Cincinnati office is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. For more information, call 513.579.9400 or visit www.mai.capital.